Maybe you procrastinated over your mortgage refinancing, hoping rates would fall a tad more. Or maybe you couldn't find the perfect home until now -- just as mortgage rates started up.
Now what do you do?
You can wait, hoping rates will edge back down. But by waiting for a small decrease you risk getting stuck with a big increase if things don't go your way.
Fortunately, there are a number of rate-trimming strategies, though most require you risk higher rates in the future.
Since early June, the average rate on the standard, 30-year, fixed-rate mortgage has gone up a full percentage point, from the record low of about 5.3 percent to 6.3 percent. Rates on 15-year fixed mortgages have gone up about the same amount, to about 5.6 percent.
For many mortgage shoppers, this is little more than an irritation, adding a smidgeon to monthly costs and depriving them of the chance to brag they'd locked in at rock bottom.
But for others, a higher rate is a deal killer, making it impossible to borrow the amount they need to buy the home they want. As a rule of thumb, that 1 percentage point rate increase causes a 10 percent reduction in the maximum mortgage for which one can qualify.
HSH Inc., the Butler, N.J., mortgage-tracking firm, suggests several ways to trim your rate.
With an ARM, you get a super, low rate for a starting period, then have a floating rate that adjusts every 12 months as market conditions change. The low starting rate allows you to qualify for a bigger loan, though you face the risk of being charged much larger rates later.
Currently, one-year ARMs charge only about 3.9 percent for the first year, HSH says. Rates then change every year for the remaining 29 years, depending on what happens to one-year bond rates. Typically, these mortgages have "caps" that prevent rates from rising or falling more than 2 percentage points a year, or more than 6 percentage points from the starting level over the life of the loan.
Three-one ARMs carry an introductory rate for the first three years and then adjust annually; they average about 4.4 percent. Five-one ARMS average 5.1 percent and seven-one ARMs 5.7 percent.
The two-one buydown.
These are mortgages that start about 2 percentage points below the going rate for 30-year fixed mortgages, then rise one point after one year and another point after two. The tradeoff is that you end up paying about half a point more than you could have gotten on the 30-year mortgage. Some two-one buydowns are now starting at about 4.5 percent, meaning they can go to 6.5 percent, HSH says.
Be careful with these, as the same terminology means different things at different companies. In some cases, "buydown" means paying more than the going rate in the initial years, and less later on.
Paying more points
A point equals 1 percentage point of the loan amount. Each point you pay lowers your interest rate by one-eighth to one-quarter of a percentage point. Although points increase your up-front costs, they will save you money if you have the mortgage long enough for the lower monthly payments to offset the points.
A shorter commitment
When you apply for a mortgage, the lender typically guarantees the promised interest rate for a set period. You may be able to get a lower rate by agreeing to a 30-day commitment rather than 60 days. First, talk to all the parties involved -- the lender, your broker, the seller's broker and so on -- to be sure you'll be able to complete the sale within the commitment period.
Of course, you can reduce the monthly payment, and assure you qualify for a loan, simply by borrowing less. It may pay to scrounge around for cash to make a larger down payment.
Homeowners who want to refinance should take a look at home equity loans, also called second mortgages. While home equity rates are usually higher than those on 30-year fixed mortgages, there are always a few lenders offering cut-rate deals to build up business. You probably won't find a 30-year home equity loan, but there are some 20-year deals and lots of 10- and 15-year deals.
Using a home equity loan to reduce your interest rate will save interest costs over the years, but it won't reduce your monthly payment if you have to pay the new loan off much faster than the old one.
Home equity loans do have another attraction, though -- application, appraisal and other up-front fees are usually much lower than fees for ordinary mortgages, and sometimes there are no fees at all.
Shopping for any of the out-of-the-ordinary loans mentioned here involves a little extra work, since advertisements usually focus on standard products. You should phone a few lenders, which are listed in newspaper ads and in the Yellow Pages under mortgages, banks and savings-and-loan associations.
Don't forget your credit union at work, or the Internet. HSH has a useful site at www.hsh.com, and the rate-tracking outfit Bankrate.com has a good site at www.bankrate.com.