If you're a homeowner -- or you want to be one -- then you have to be smart about your mortgage. After years of cheap financing for homes, the mortgage market has been vulnerable to the threat of rising rates. In just the past week, average interest rates on 30-year mortgages have jumped by nearly half a percentage point, reaching their highest level in nearly a year. That makes it more important than ever to take action quickly in order to avoid what could be a costly mistake. Below, we'll look at three smart moves you can make whether you have a mortgage already or are in the market to get one.
1. Know how mortgage rate locks work if you're buying a home now.
With mortgage rates climbing through the roof, many would-be homebuyers are scurrying to lock in their mortgage rates. It might sound like a no-brainer to try to get a mortgage rate lock in what seems to be a rising rate environment right now, but many borrowers end up being disappointed because they misunderstand how a rate lock actually works.
Rate locks are usually available for periods of 30, 45, or 60 days, and in some cases, you can get even longer lock periods. However, policies among lenders vary concerning how rate locks work, and you can end up having to pay additional costs in order to lock in a rate for a certain period.
Moreover, rate locks don't always result in your truly locking in a rate. For instance, if you change the amount of your down payment or type of loan you get, then your rate can still change even if you thought you had locked in a lower rate. Similarly, if the appraisal on your home turns out to be different than expected or if your credit score changes, it can result in a higher rate.
Many mortgage professionals will push rate locks in order to increase certainty. But before you go forward with it, make sure you understand how your rate lock will work and whether it's worth the price you'll pay.
2. Take one last look at refinancing an existing mortgage.
The best time to refinance a mortgage is before rates start to rise, so you might already have missed the boat on this score. Nevertheless, there are still many homeowners who have mortgages back when rates were at 5%, 6%, or even higher. Especially if you intend to live in your home for an extended period of time, reducing your rate by even a single percentage point can sometimes be enough to make up for the closing costs and other expenses associated with refinancing.
It's even more important to look at refinancing if you have an adjustable-rate mortgage. With rates starting to move up, you can expect the interest rate on your adjustable-rate mortgage to move higher as well. That will result in higher monthly payments. By refinancing into a fixed mortgage, you can get the predictability of not having to worry about future increases. That certainty comes at a cost, though: fixed rates will typically be higher than your current adjustable rate. Again, a lot depends on whether you intend to stay in your home for just a few years or whether you're in it for the long haul.
3. Stop paying private mortgage insurance if you don't need to.
Mortgage lenders typically force borrowers to take out private mortgage insurance policies, also known as PMI, if the down payment on the home is less than 20% of its value. PMI provides protection to lenders in case the home's value drops below the outstanding balance on the mortgage. Given how millions of homeowners were in this situation during the housing bust of the mid-to-late 2000s, lenders are more aware of that risk than ever.
Even if you didn't put 20% down when you bought your home, it's possible that you might be able to get out of paying PMI sooner than you expected. If a rising housing market has boosted your home's price, then it's possible that your loan could be less than 80% of the new value of your home. If that's the case, then a new appraisal could reveal that you shouldn't have any further requirement to pay PMI. Theoretically, lenders are supposed to stop charging PMI when the loan-to-value percentage drops to 78%, but it's worth looking closely and nudging your lender if necessary to make sure they make good on their requirements.
Whether you're buying a home or already own it, a mortgage could be the biggest loan you ever take. By being smart with your mortgage, you can save thousands of dollars and bring buying the home of your dreams within reach.