Financing Information

Are Rates going UP or DOWN ?

Interest Rates are at historic lows. Together with the relatively low housing prices, this is a terrific time to buy. The following graph shows the National Average Contract Mortgage Rates from 1963 to the present.

mortgagerateshistoric_706 Copyright © 2008 Mortgage-X.com
Source: www.mortgage-x.com
Reprinted with permission

Only time will tell where interest rates are headed, but given that they are lower than they have been in the last 50 years, I think it's a good bet that interest rates will be headed up rather than down in any significant way.

Fixed or Variable Rate Mortgage?

When deciding on a mortgage, one of the key factors to consider is how long you plan to stay in your home. On average, americans sell one home and purchase another every six or seven years. If you expect to stay in a home for 5 years or less, you will find that rates on 5-year ARM's (Adjustable Rate Mortgages) are lower than either a 30-year fixed mortgage or even a 15-year fixed mortgage.

If you see yourself staying in the home for 10 years or more, you probably will be better off with a fixed rate mortgage. The most common are 30-year fixed. However, 15 and 20 year fixed rate mortgages are also available. If you can afford higher monthly payments, a 15-year mortgage or 20-year mortgage will have lower rates and, over time, cost you less than an 30-year mortgage. But this strategy only works if you are comfortable with higher monthly payments for the term of the loan. If you are trying to minimize your monthly payments, stick with the 30-year fixed rate mortgage.

If you think you'll be in the home for between 5 and 10 years, it's really a toss-up whether an ARM or a fixed rate mortgage is a better bet. If interest rates increase by 2 percent over the next 5 years, then the fixed rate mortgage would be a better choice. It all depends on your outlook on where interest rates are going. And none of us has a crystal ball to predict that accurately.

Rate Locks ?

A Rate Lock is where your lender agrees to lock in the mortgage rate at time of application rather than accepting the interest rate on the day you close. Typically, your closing will take place 30 days or so after you apply for the mortgage. In that amount of time, it's not uncommon for rates to change by an eighth or a quarter percent. It could even be more than that in a very volatile month.

If your mortgage approval margin is very slim (your lender can tell you whether this is the case), then it's essential to lock your rate. If you don't and rates increase, you could find yourself in the position of no longer qualifying for the mortgage.

Aside from the above situation, there's no right or wrong answer to whether it makes sense to lock the rate. If you think rates will increase over the next month or so, then lock the rate. If you think they might dip a bit, then don't. And remember: even though I think that rates are on their way up, this opinion applies to the broad market tendencies. Interest rates will continue to wiggle their way both up and down on the way toward the broader trend.

Still need help?

I work with several different mortgage professionals, and am happy to refer you to one or more of them. Let me know if I can provide you with a referral:

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