The recent drop in mortgage rates may have you dreaming of buying a new home or refinancing your current house.
You’re not alone.
Housing sentiment has surged thanks to those low rates, according to government-sponsored mortgage giant Fannie Mae. Its monthly survey, released Monday, shows that positive sentiment in March jumped to the highest level since June — which was just below the record high.
Mortgage application volume also rose after rates saw their biggest weekly decline at the end of March. Volumes were up 28 percent from a year prior, according to the Mortgage Bankers Association’s seasonally adjusted index.
But if you are among those who may be put off by the application process, or aren’t sure if it is the right move to make — you should still check things out, said Matt Weaver, loan officer and vice president of sales at Cross Country Mortgage, based in Boca Raton, Florida.
“Speak to someone that is a professional in the industry and get preapproved upfront to see where you stand — whether you are looking to buy today, six months from now or a year from now,” he said.
The deep drop in rates came in the week ended March 28. The average rate on the 30-year fixed-rate mortgage fell to 4.06 percent with an average 0.5 point, according to Freddie Mac. (Like Fannie Mae, Freddie Mac is a government-sponsored mortgage company.)
Rates have since fluctuated slightly. The average 30-year home loan rate is now 4.07 percent, according to Bankrate’s latest survey of the country’s largest mortgage lenders on Monday.
“We did not think that we would see interest rates come back to these numbers,” Weaver said. “We were pretty certain the train had left the station and wasn’t coming back. It’s worth coming out and taking advantage of this.”
Homebuying: Know your number
To start, it’s important to know how much you can afford.
For one, you’ll need money for a down payment.
Typically, that is about 10 to 20 percent of the purchase price of the home, depending on the type of mortgage. By putting down a higher amount, you may be able to lower the interest rate on your loan. However, there are also mortgages that allow lower down payments, such as 3% or 5%, and even some with no money down.
Bear in mind that you’ll have to take out private mortgage insurance if your down payment is less than 20 percent on a conventional loan. The annual cost of PMI is approximately 1 percent of your outstanding loan balance and is added to your monthly mortgage payment, according to Chase.
Next, figure how much you can spend on your monthly payment. That includes the principal, interest, property taxes and homeowners insurance.
Getting preapproved for a loan by a reputable bank or mortgage company will allow you to find how much you can borrow and what the best loan is for your situation.
“Meeting with an advisor to fully understand your options and the fundamental process is really critical,” said Lawrence Bailey, head of retail at Chase Home Lending.
The main thing banks look for is the amount of your debt-to-income ratio. It has to be below 43 percent to get a prequalification, according to Chase. They also look at your credit history and your planned down payment.
However, even if you get pre-qualified for a certain amount, you should still take a look at your budget before deciding how much you want to spend. Generally speaking, that means allocating 50 percent of your monthly income on “needs” such as your mortgage and other household expenses, 30 percent on your “wants” and 20 percent on your savings. Of course, it could vary depending on where you live.
Refinancing: When is it worth it?
When it comes to whether you should refinance your current mortgage, Chase’s Bailey said he generally uses the “half point rule,” which means the new rate is at least 0.5 point lower than your current one.
However, in reality, it comes down calculating what you’ll be saving every month versus what it’s going to cost you to take out the new loan — and then figure out when you will break even, he explained. If you plan on staying in the house for longer than that time, it could be a good idea to refinance.
Depending on your timetable, you can also look to refinance at a shorter fixed period, such as a 15-year loan or an adjustable-rate loan that has a shorter fixed term before the rate adjusts. Those loans typically have a lower interest rate.
We did not think that we would see interest rates come back to these numbers...It’s worth coming out and taking advantage of this.
Matt Weaver, Crosscountry Mortgage
CrossCountry Mortgage’s Matt Weaver believes it is a “mistake” to only look at the savings you’ll get from the lower rate.
Refinancing can also allow you to pull out cash to do things like pay off some higher-interest debt, such as credit cards, fund a family circumstance, such as a wedding or college, or for home improvement.
Also, if you have an additional line of credit on the house in excess of $15,000 or $20,000 and no clear 24-month plan on how to get rid of that loan, Weaver said it would be worth consolidating it with the new mortgage.
When does an ARM make sense?
To get a lower rate than the one on a typical 30-year loan, an adjustable-rate mortgage could be an option. These loans have a fixed-rate period before the rate moves based on the index it is tied to. That means you could wind up with a much higher rate once the fixed period ends.
“It really comes down to how long you plan on being in the home,” said Bailey.
Weaver agrees. He would only look at this option if you had a clear, defined time horizon. There are loans for five-year, seven-year and 10-year fixed periods.
“As long as your exit strategy matches the fixed period than it is worth considering,” he said.
When not to jump on low rates
Just because lower rates are available, it doesn’t necessarily mean you should move up your timetable to purchase a house.
“You have to figure out what the incentive is on why you want to buy the home,” Bailey said. “Are you buying it for the stability to raise your family and will you be there for a while?
“Or is it in investment opportunity?”
Bailey advises figuring out what you want to buy, in which neighborhood — and why. “Let that process play out,” he said, noting that rates will go up and will go down. “The one thing I’ve stopped doing ... is predicting what the rates will do.”
Weaver suggests those who have a short time horizon stay away from buying a home. If you plan on leaving the house in less than 36 months and you have no intention of holding onto it and converting it into a rental property, you should continue to rent, he said.
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