If you've been looking at today's mortgage rates you know the drill: For the past few months rates have risen above the lows seen in 2012, meaning that the hunt is on for loans with the lowest possible monthly costs.
The idea of "higher" mortgage rates is curious: The rates seen in late 2012 were the lowest in 65 years. Yes, rates are higher today but they remain low by historic standards and certainly nothing like 1981 when interest levels topped 18 percent -- and homes still sold.
So, what can borrowers do in the face of rising rates? Here are four strategies to consider:
First, lock-in your rate. If you think mortgage rates are headed higher than lock-in today's rate. Locking-in rates gives some certainty to the lending process and if rates rise you have protection, a hedge against higher costs.
Second, lessen the term of your mortgage. Yes, 15-year home loans have higher monthly costs than 30-year mortgages. That's because there is less time to repay the debt. But, rates are lower. Last week Freddie Mac reported that the typical fixed-rate for a 30-year loan was 4.51 percent while 15-year financing was priced at 3.53 percent.
Another advantage to 15-year loans: The potential interest cost for the loan is substantially lower. A $150,000 loan at 4.51 percent over 30-years has life-time interest cost of almost $124,000. The same amount at 3.53 percent over 15 years has an interest expense of about $61,500.
Third, consider lowering your mortgage rate by choosing an ARM or hybrid ARM. ARMs are adjustable-rate mortgages. The interest rate is fixed for an initial period (which can range from one month to ten years). Once this initial period expires, the rate begins adjusting up or down at set intervals. ARMs are less risky for lenders, so they come with lower rates than fixed loans do. You should be able to get a start rate significantly-below 30-year costs. For instance, in July 2013, Freddie Mac reported that the typical 5/1 ARM (with an introductory rate fixed for the first five years) rate was 3.26 percent, about one percent lower than the 30-year fixed rate.
Fourth, you might want to lengthen your loan term and drop your payment. Forty-year loans will be harder to find, though, after January 10, 2014, because Fannie Mae and Freddie Mac will no longer be purchasing them.
Forty-year loans have a lower monthly cost because borrowers have more time to repay the debt. However, because the term of the loan is longer, the total interest cost is higher than a 30-year loan and with such long-term the debt with 40-year financing is paid down more slowly.
Of course, it pays to watch mortgage rates daily. Sometimes they simply go down.