Cheap Mortgages: Going, Going, Gone?

mortgage rtesTrying to predict interest rates or mortgage rates is a fool’s exercise. Yes, they’ve been heading up lately, but I spent an hour on a conference call today listening to the top economist and investment strategist at a leading U.S. financial institution predicting that in a short while rates will drop down again.

So leaving aside whether mortgages are permanently or just temporarily heading higher, here’s what we do know:

If you are in the market to buy, try to speed it up.  Prices are going up, and mortgage rates are probably off of their lows and headed higher. Wait too long, and higher financing costs may take your dream home out of reach.

If you are thinking about refinancing, get moving. If you intend to stay in your home for several more years, and have an older, higher-rate mortgage or an adjustable-rate mortgage (ARM), you can undoubtedly save some money or lower your anxiety level by refinancing. Appraised values are up and some lenders are showing additional flexibility, so try, try again even if you couldn’t get approval before. Here are the caveats: don’t increase your indebtedness (no more cash-out refinancings), and try not to extend your mortgage’s maturity. The goal is to cut overall interest costs, not dig a deeper hole.

Don’t kid yourself, rates are still great.  “Even if they go up a percentage point or two, however, mortgages will still be relatively low. Historically, 30-year loans are usually 5.5% or higher,” writes Les Christie in CNNMoney.  That’s echoed by Nick Timiraos of the Wall Street Journal, who argues that “even with the recent jump, economists say, mortgage rates are still extremely cheap—close to half-century lows.”  I remember paying 8% or more on my first mortgage, and there’s always someone in the crowd, during these discussions, who recalls paying in the neighborhood of 12% (Yikes!). No wonder we couldn’t afford much in those days!

And yes, I still like it when clients have a mortgage. In my mind, when someone offers to lend me money for thirty years at 4% fixed before tax, and even less after tax, I can’t believe my good fortune. Just like a bank or any other business, it pays to borrow cheap and then invest that money for higher returns elsewhere. With inflation, the amount you owe the bank gets smaller, and smaller, and smaller with time. So long-term fixed mortgages are usually incredibly beneficial to borrowers. Of course, as with everything, there are exceptions. For example, those who are extremely risk averse, don’t feel comfortable with debt, who invest in low return assets like CDs and Treasury bonds, or who lack investing and spending discipline, aren’t able to derive the same benefit from borrowing. The moral? Run the numbers, and make the right decision for you based on your own unique set of circumstances.

Financial Tip:     “A rule of thumb holds that every one-percentage-point increase in mortgage rates makes homes about 10% more expensive for buyers.”     Nick Timiraos, “Mortgages Shoot Up, But Still a Bargain,” Wall Street Journal, June 18, 2013




About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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