The last few years have seen some of the lowest interest rates in over 20 years. Many people have taken advantage of the phenomenal opportunity to purchase homes at great rates! We have enjoyed the low rates, but there are some indications that they may be coming to an end soon. Federal Reserve Chairman Bernake has said the recession is "very likely over" and there seems to be plans to begin slowing down on lending and bailout programs. While they did extend the rescue program for Fannie Mae and Freddie Mac on 9/23/09, they did not renew it, despite high unemployment.
So what does all this mean for interest rates and home mortgages? Well, if we are truly coming out of the recession, it means interest rates may soon begin to creep up as the Federal Reserve tries to keep the economy stable. The Fed uses its rate-setting to try to balance unemployment and inflation; normally this means lowering rates during a recession to give the needed boost to the economy and then raising rates during the recovery to keep inflation at bay. The Fed has bought up toxic mortgage-backed securities to help stabilize banking. As lenders become more stable, the Feds will be less involved and the interest rates will reflect market forces. This will push up interest rates.
The unknown is when and how much the rates will go up. The time to take advantage of these low mortgage rates is now!
At the moment, rates as low as 4.75% are available at some banks for a 30 year fixed mortgage, with lower rates available for adjustable rate mortgages and higher rate ones available for jumbo loans and FHA loans - if you can put 25% down.
With any loan you choose, you need to be concerned with the total lower cost of the loan to you. The goal is to minimize your out of pocket expense as much as possible at closing and with your monthly payment. How much do you have available for a down payment? How much can you pay monthly? Are their points involved in the loan? Are there other fees involved? Your credit rate may influence what you qualify for. The chart below shows how wide the spread can be based on a loan of $417,000 for all loan types except the Jumbo ARM, that loan is calculated at $500,000.
As you can see, the range is significant. So how can you know which rate and loan is right for you? It all depends on your situation.
If your plan is to stay in your home for the long term, the and have the conventional 20-25% to put down, a conforming 30 year fixed loan will probably be your best choice if you can obtain a package with a low rate, no points, no fees, and a low payment.
If you know your circumstances will change in the next few years, the ARM loan is a good choice for you. For example, if you are transferred every four or five years or if you expect your income to increase, you should take advantage of the better rate. With an ARM, you need to familiarize yourself with a few basic terms:
- The index rate. Most lenders tie ARM interest rates changes to changes in an index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations.
- The margin. This is the percentage points that lenders add to the index rate to determine the ARM's interest rate.
- Interest rate caps. These are the limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan.
A loan with a 5/1 ARM would be fixed for five years, then adjust annually up to the amount of the margin until it reaches the rate cap.
With an ARM, you can get more home for your dollar. For example, for an $1,800 monthly payment, you can qualify for a $388,000 mortgage with an ARM loan vs. one for $340,136 with a conventional one. These mortgages have gotten a bad reputation throughout the mortgage crisis for resetting to payments that are unexpectedly high, but ARM are indexed to have a periodic and a lifetime cap; depending on the terms, they may be convertible into fixed rated terms
If your credit score is lower, or you lack the 20-25% downpayment, then the FHA 30 year fixed mortgage is the better plan.
In certain circumstances, you may have to pay points. Though it preferable to not have to come up worth extra cash at closing. It can be worth it to do so to secure a lower interest rate. The points are deductible on the current year's tax return. It is usually better to pay points than other fees, which are not deductible.
The best interest rates we have seen in years are still available! How long they will last is unsure. If you want to take advantage of these rates before they are gone call Karen Breen Elia or Louis Elia at ChicagoCityHomes! They can help you with information on the current interest rates or mortgage loan types. Even more important, ChicagoCityHomes can help you find the right Windy City home for you!
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