Strategies For the New Mortgage Interest Rate Environment

Mortgage rates have surpassed last year's bargain-basement levels, but that doesn't make them a bad deal. In fact, you can still get some of the lowest mortgage rates in history. Better still, if you play your cards right, you'll be able to squeeze even more bang from your housing buck.

High, Not High

Mortgage finance corporation Freddie Mac says that 30-year fixed mortgage interest rates crossed above the four percent threshold back in June of 2013, hitting 4.46 percent. Amazingly, though, rates as of May 1, 2014, are substantially lower -- 4.29 percent, in fact! It's unlikely that rates will drop below four percent anytime soon, but these current levels are still worth celebrating (and taking advantage of).

Freddie Mac has recorded mortgage rates since the early 1970s, and out of 41 full calendar years of history, 30-year fixed mortgage rates dropped below five percent for the year just three times -- 2011, 2012, and 2013. And the historical average? It's 8.52 percent!

Flogging the Market

Still bummed that you missed the day in 2012 when rates hit 3.35 percent? Don't worry -- here are five things you can do to get a better mortgage even when rates top four (or even five) percent.

1. Start Sooner
You need savings for emergencies, of course. However, if you are trying to pull a down payment together, it might be worth tapping your emergency funds to get in your home faster. Rates being paid on checking and savings accounts are still near zero, while home prices are moving up and mortgage rates are trending that way too. You may be able to save more down the road by spending now and keeping your costs down. Of course, you'll use the money you save to replenish your emergency account.

2. Go Shorter
Today's rates on 15-year home loans (3.39 percent according to Freddie Mac) nearly equal the 30-year rates at their lowest ebb (3.35 percent).  If you can afford a higher monthly payment, think about refinancing to a shorter loan -- you'll pay a lower rate and pay much less interest over the life of the loan. This may cause little hardship if you’ve been paying for several years on a 30-year mortgage -– essentially, what you have left may be closer to a 15-year loan anyway. While you pay a higher monthly payment in the short run, in the long run it should save you a considerable amount of money in the form of a lower interest rate and accruing interest over a shorter time.

3. Get Better
Fannie Mae and Freddie Mac, the companies that buy and sell most mortgages in the US, price their loans using a tiered system, and the credit scores associated with these tiers are 620, 640, 660, 680, 700, 720 and 740. Crossing each of these thresholds typically translates to a lower mortgage rate, so if you are just below one of those key numbers, see what you can do to bump your credit rating up before you apply for a mortgage. That might mean paying down some balances to reduce the percentage of credit used, or simply paying on time for a few more months. You can correct errors that may be dragging your score down, or add to a thin file by becoming an authorized user on a relative's account.

4. Get Flexible
Rates for adjustable rate mortgages (ARMs) and hybrid ARMs are still attractive. In fact, the spread between a 5/1 ARM (which has a rate fixed for five years) and a 30-year fixed rate loan is over one percent today! The average home buyer, who according to the National Association of Realtors often keeps a home for just a few years, may never even see an interest rate increase. Of course, ARM rates do adjust upward when inflation kicks in. However, if you have a plan for paying off the mortgage, either by selling up or prepaying the home loan, this may be a great strategy for you.

5. You Shop, They Drop
Never assume all mortgage rates and lenders are the same. An industry consulting firm called Mortgage Industry Advisors Corporation (MIAC) found that mortgage rates vary on any given day by .25 - .50 percent between the highest and lowest offers. With a $300,000 loan, the difference between paying 4.0 percent and 4.5 percent is $31,680 over 30 years! That's a lot of money to leave on the table when shopping only takes about five minutes online.  Get multiple quotes from competing lenders to make sure you are getting the most competitive rate available, whatever the market conditions are.

The average level of mortgage rates is something you have to deal with, but can’t control. You’ll make the best out of the situation if you focus on those things you can control.

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