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What To Do When Mortgage Rates Are Rising

It's both true and unfortunate that mortgage rates have risen in recent weeks, but you haven't run out of options to keep your rates and payments low. We've outlined seven things you'll need to know when rates are rising/have risen, and you might be able to help yourself to some savings. -KTG

Don't panic. Mortgage interest rates are notoriously fickle, following the whims of the bond market. While it's true that interest rates rise much more quickly than they fall, even a sharp jump in one day or week can be erased over the next week or two. The current 30-year fixed rate mortgage, at an average of just over 8%, still ranks among the low points of not only this decade, but well below the rates of 1996, for example. Plus, even a one-half percent rise means only a $34 increase for a $100,000 loan. (7% to 7.5% used for example).

Consider another product. Today's mortgage market features a wide array of products, from long-term fixed rate to short term adjustable. If a 7.5% 30 year fixed rate mortgage busts your budget, maybe a 5/1 Hybrid ARM will fit the bill. These have a fixed interest rate for the first five years at roughly one-half percent below the 30 year fixed; you get in at a rate you can afford, but must pay attention for opportunities to refinance, since after five years, your rate will change once per year. Hybrid ARMs also come in 3/1, 7/1, and 10/1 flavors; the longer the fixed period, though, the lesser the interest rate savings.

What about a '2-1' buydown?With a '2-1' buydown, you start with an interest rate that is about two percentage points below the market rate for the first year. After that, the rate steps up by 1 percentage point in the second year, then rises again by 1 percentage point a final time for the 3-30 years. The catch: The final interest rate usually ends up about one-half percent above what you would pay today. So, rather than getting 8% today, you get 6.5% in the first year, 7.5% in year two, then 8.5% for the remainder of the loan.

Pay more points to lower the rate. If you've got spare cash that you can use, it's possible to pay additional points to lower the interest rate. Each point will cost you 1% of the loan amount, so it's not a cheap option, but each point should lower your interest rate bewteen 1/8% and 1/4%, depending upon the product you choose. As an example, if you pay two points, you can lower that 7.5% to 7% for $2,000 -- which you'll get back at $34 per month -- you'll break even in about 5 years. If you can qualify, you needn't pay these out of pocket, as you may be able add them to the amount you're borrowing, especially in a refinance transaction.

Take a shorter commitment period. One of the lesser-known facets of mortgage pricing (rates) is that lenders offer a wide variety of commitment periods, often 30 days, 45 days, 60 days and longer. The committment period is simply the time expected to close the loan, and mortgage lenders often quote an "average" one, like 45 days. If your paperwork is in order, and you're a good credit quality borrower, you might be able to close you loan in only 30 days -- and your rate will be slightly lower as a result of the shorter commitment period. Worth asking about.

Offset the rise in rates with a bigger downpayment. You can still keep your monthly costs down if you've got the money to do so. That $100,000 mortgage at 7% has a monthly payment of $665.30; to achieve that payment at 7.5%, you'll only be able to borrow $95,149, which means you'll need to come up with an additional $5,000 to keep your payment level. If you're cashing stocks to generate your downpayment anyway, you might consider this option.

Get a "floatdown" option. Think rates might be lower by the time you close, but are too afraid to let your rate really "float"? A floatdown option may be the best of both worlds. In it, you can usually either pay a small fee (one-eighth to one-quarter point is common) to have access to lower rates if they fall during your commitment period. Another method sets limits of how high or low your rate can travel during the commitment period, but you may start at a rate that is higher than market to start with (i.e. 7.625% with a floatdown option to 7.25% versus 7.5% with no floatdown option).

Best of Luck!

Source: www.HSH.com (HSH Associates)








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