by Christy Bieber | Aug. 31, 2020
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Now may be a good time to lock in a mortgage, and these are some options to choose from.
Homebuyers may be unhappy today to see the average rate for a 30-year fixed-rate mortgage has crept above 3.00% again after falling below this threshold in recent days. But, while would-be borrowers have been spoiled as rates have repeatedly hit new record lows, these mortgage rates still remain very competitive and are well worth locking in.
Here's what you need to know about average rates for Aug. 31.
|30-Year Fixed Mortgage Rate||3.03%||3.194%|
|20-Year Fixed Mortgage Rate||3.016%||3.172%|
|15-Year Fixed Mortgage Rate||2.551%||2.770%|
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While 30-year mortgage rates had fallen below 3.00% several times in recent weeks, an average interest rate of 3.03% for Aug. 31 is a great rate by historical standards and many homebuyers will find that locking in makes sense. If you take a $200,000 loan at 3.03%, your principal and interest payment would total $846 per month (taxes and insurance are extra) and total loan costs would add up to $304,721. This includes $104,721 in interest paid over the life of the loan.
A 20-year mortgage provides the same benefits as a 30-year fixed rate mortgage in terms of the fact your payment and interest rate do not change for the life of the loan. However, you'll have higher monthly payments but lower total interest costs due to the fact you're paying off your loan a decade sooner. At today's average interest rate of 3.016%, you would be looking at a monthly payment of $1,111 and total loan costs of $266,591.
A 15-year fixed rate mortgage also offers predictability in terms of monthly payment and interest costs, but average interest rates are well below those charged on either 20- or 30-year loans due to the very short payoff timeline. Since you are paying your loan off so quickly and the average interest rate for Aug. 31 is just 2.551%, you would be looking at a monthly payment of $1,338 for a $200,000 loan. If you're able to afford to make such a high payment, you'll benefit from the fact your total loan costs are just $240,909 -- $63,812 below the total costs of a 30-year loan.
A 5/1 ARM is an adjustable-rate mortgage in which the initial rate you're offered remains locked in for five years. It's an alternative to other ARMs, such as a 7/1 ARM which gives you seven years before your rate changes. Unlike with a fixed-rate loan, your interest rate is tied to a financial index and can change over time, which can alter the amount of your payment.
Since you could end up with a higher rate than you started with, ARMS are riskier than fixed-rate loans but they make sense if you can get a low introductory starting rate and plan to sell or refinance before it adjusts, or if you think rates will go down. With rates near record lows and the average 5/1 ARM rate of 3.305% coming in above the average rate for a 30-year fixed rate loan, now isn't a good time for most buyers to take out an adjustable-rate mortgage.
A mortgage rate lock guarantees you a specific rate for a preset period of time -- usually 30 days, but you may be able to lock in your rate for up to 60 days. You'll generally pay a fee for a mortgage rate lock, but in exchange, you're protected in the event that there's a substantial jump in rates between now and your loan closing date.
If you plan to close on your home within the next month, then it could pay to lock in your rate based on how today's numbers look, and also based on recent rate fluctuations. Today's rates are actually quite competitive across the board, so no matter what loan term you're interested in, you have a chance to lock in a good deal.
However, if your closing is more than a month away, you may want to choose a floating rate lock instead for what will generally be a higher fee, but a potentially worthwhile one. A floating rate lock allows you to snag a lower rate on your mortgage if rates fall prior to your closing, and given the way rates have moved in recent weeks, there's a chance they could go lower in time.
Your credit score and other financial details will affect the rate you can qualify for, so you should shop around and compare rates and terms before locking in. Doing so will enable you to get your loan at the best possible rate, which can make a big difference in monthly payment and total interest costs when you're borrowing so much for a house.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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