When mortgage rates are low, it's easy to think they'll only go up – better lock in before they rise! But is that the best strategy? Before signing anything, here's what you should do first.
March 9, 2016
When mortgage rates are low, it's easy to think they'll only go up – better lock in before they rise! But is that the best strategy? Before signing anything, here's what you should do first.
When rates are low, it’s tempting to lock into what seems like an amazing deal in case there’s a sudden change. The same instinct can come up if you think rates are going to rise. Even if the current mortgage rate isn’t a great deal, it can’t be worse than what you’d get if you wait...right?
So what should be your first step?
Like with all financial decisions, it’s important to not get carried away by any feeling of panic you sense from friends, family or even the media. After all, it’s your money, and you should do a little bit of research before you decide how to spend it.
Market analysis has shown that, in an ideal world, mortgage borrowers can optimize their mortgage term selection.
In theory:
In practice:
So what should you do? Start by running some numbers. Let’s take a historical example:
Based on strict comparison of the size of the bi-weekly payment, the one-year term appears desirable...
Yet, in the above example, the initial market theory would suggest borrowers should consider locking into longer terms – a three-, five-, or even seven- year term mortgage.
Why? Because the mortgage yield curve, or the absolute difference between short- and long-term mortgages, is currently large.
You should also remember that rates you are initially quoted are the lender’s “posted” rates, or the rate that you see on display – and it can be quite different from the “effective” rate, or the rate you’ll actually be charged.
In the end, choosing to lock into a long-term mortgage or going for a short-term option will depend on what rates the lenders are offering, how much leeway you have to negotiate within, and which way you think interest rates will go.
Smart Tip provided by The Financial Pipeline. Founded in 1996 by a group of portfolio managers, The Financial Pipeline is dedicated to providing financial knowledge and education to anyone and everyone with even a passing interest in finance. Our motto, “Financial Information For the Rest of Us,” speaks for itself.
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