In mid-April, mortgage interest rates on 30-year fixed-rate loans increased to 5.21 percent, an eight-month high and a reminder that low interest rates won’t last forever.
Since then, rates have dipped below 5 percent to near-record lows. Interest rates are expected to be higher at the end of 2010 than they are now, perhaps in the 5.5 percent to 6 percent range, according to sources like Fannie Mae and the National Association of Realtors. Between now and then, rates are likely to be volatile.
Borrowers who are applying for a mortgage aren’t protected against a sudden rise in rates until they lock in a rate. Mortgage rates can change two to three times a day. If you can lock in a reasonable rate, you should. It’s hard to pick the bottom of a rate cycle. Within the blink of an eye, you could miss a super-saver rate and end up with a higher rate than if you’d locked in a rate sooner.
Homeowners who are refinancing can afford to put their application on hold if rates jump and proceed with the process when and if rates subside. Homebuyers operating under a purchase contract deadline don’t have this luxury. Most sellers won’t grant an extension until rates move lower.
A lender won’t lock in a rate for a buyer until a purchase contract is accepted by the seller. The transaction needs to close before the lock-in expiration date.
HOUSE HUNTING TIP: Borrowers should ask their mortgage broker or agent to get them preapproved for the maximum mortgage amount they can afford. Then determine the maximum-size mortgage you can accept without cramping your lifestyle, even it if it’s less than what the lender says you can afford.
It often takes time to find the right home to buy, particularly in highly desirable, low-inventory niche markets. By qualifying for a higher loan amount than you need, you’re covered if rates rise during your home search. You won’t qualify for the maximum you could have afforded at a lower rate, but you’ll be able to qualify for a smaller loan amount at a higher rate.
When rates are volatile, it’s a good idea to let the seller know you are willing to accept a rate that is higher than the going rate. If you are competing with other buyers, this lets the sellers know that you won’t cancel the contract if rates rise 1/8 percent to 1/4 percent before you have a chance to lock in a rate.
If rates rise before you find a home to buy, consider paying points (1 point equals 1 percent of the loan amount) to buy down the rate. Points work in an inverse relationship with mortgage rates. If you pay higher points upfront, the mortgage interest rate will be lower.
Paying points to lower the rate makes sense only if you stay in the home and keep the loan for long enough to break even. To determine how long you need to make mortgage payments in order to break even, find out how much you’ll save per month at the lower interest rate.
Multiply this by 12 for the annual savings. Divide the points, converted to dollars, by the annual savings at the lower rate. This gives you the number of years you need to make payments on the mortgage in order to recoup the cost of the points you paid up front.
THE CLOSING: Points paid on a purchase mortgage can often be taken as a tax deduction for taxpayers who itemize deductions. Check with your accountant to find out how paying points will affect your bottom line.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."
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