The interest rate on a 30-year fixed rate mortgage is now 5.8 percent. And this could be your last opportunity to take advantage of such low rates. “Today” financial contributor and Money magazine editor-at-large Jean Chatzky gives advice on refinancing your mortgage or buying a new home.
Mortgage rates dropped last week and are now at their lowest levels since July. Thirty-year fixed rate mortgages are at 5.58%, a 40 year low. And it's another chance to refinance. Rates were at 6.2% in early December. The Wall Street Journal reported 45% of homeowners can profitably refinance. That's a substantial number of homeowners. Anybody with a rate over 6.8% should be looking to refinance.
Why have rates dipped?
The end of December is always slow for business and the economy. During the first couple weeks of the year people expect the economy to shift into gear if it was going to. It didn't come roaring back this month. We still have a jittery economy. Unemployment numbers are dismal. As a result of that people want a sure thing for their money. During the first weeks of the year they bought bonds, and that pushes mortgage rates down -- a simple explanation.
How long will mortgage rates be this low?
Historically we know that as the economy grows -- and indications are that the economy is growing -- these opportunities for low interest rates will become fewer and fewer. Traditionally they only last a couple of weeks. The unemployment report two weeks ago was a surprise, and another surprise from another piece of economic data can always be another surprise and keep the economy jittery longer. But traditionally these kinds of dips only last a couple of weeks.
Refinance Your Mortgage
Go shopping
If you have a loan above 6.5% you should be out shopping for a mortgage. There is no one source for the best rate on a mortgage. Talk to mortgage brokers, go on line and look at E-LOAN and Lending Tree, and your bank. Find out if the bank where you have your current loan will do a modified refinance so you don't have to go through all the paper work again.
Last summer, when rates were so low and the refinance business was overloaded, a lot of people were fed up by how long it was taking to get their loans closed. But now there's been a break, there isn't the backlog that there was last summer, and it's possible to close a deal in 30 to 35 days. You'll get better service than you did last summer. This is a good time to refinance.
Pick your loan
More and more people are taking out adjustable rate loans (ARMs). About 25% of mortgages are ARMs. People are squeezed. Home prices are high, and people need to find lower interest rates to afford the home they want. For people who think they'll be in their house for 7 or more years a 30-year fixed mortgage will be best.
If you're refinancing and have paid off a substantial part of your debt, then go with a 15 year loan and pay it off early. One worry is that people have refinanced so many times that there will be too many 50 and 60 year olds who still have mortgages. Our parents didn't, they paid off their mortgages before retirement. Going into retirement with a mortgage will set you back considerably. So if you can take the short-term loan, do it.
People who should be looking at ARMs should know they have a shorter time horizon, like they'll be moving for a job, or will want a larger house down the road. They should look at a 5-1 ARM -- fixed for the first 5 years, then it begins adjusting. The rate on the 5-1 is 4.6% now.
Lock in
Absolutely lock in your rate. People didn't think rates would go this low again. The fact that they have is a bit of a gamble. Don't hesitate, do it. If you're optimistic and think rates will go lower, then buy a provision to float the rate (it will cost .25 of a point), and if rates dip further you're covered.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2004. All rights reserved. For more financial advice, visit the Money magazine Web site at: