Ah, the joys of homeownership.
You spend your weekends fixing things and have no choice but to put your vacation fund toward a new hot-water heater.
On top of it all, you constantly have to keep one eye on the ever-changing mortgage rates, since Alan Greenspan and his cronies seem intent on continuing their "measured" tightening campaign.
determination and the renewed threat of inflation, it seems pretty clear those interest rates are on their way up. So when rates actually take a dip, as they did recently, you can't help but wonder if you should capitalize on the moment and refinance.
Granted, the current rate drop is nothing to get too excited over. Mortgage rates were averaging 6.1% and have drifted back to around 5.9%, says Keith Gumbinger, vice president of HSH financial publications of Pompton Plains, N.J., which tracks a variety of loan products.
Still, with the 30-year fixed mortgage hovering around 6%, it might be time to refinance your current loan. That's especially true if you have an adjustable rate mortgage, or an ARM, as the industry calls it. Ifyou have an ARM, your mortgage has an interest rate that changes periodically, according to an index, such as Treasury bills. So your monthly payments go up or down each time the rate is adjusted.
ARMs were pretty popular over the past year or two, mainly because the rates on these loans are generally lower then the typical 30-year fixed mortgage. So many of us, yours truly included, hopped into an ARM as a way to jump into a bigger house. By paying a lower interest rate, you canborrow more money without sending your monthly payment through the roof.
For instance, let's say you bought a $300,000 house and put down 20%. If you went with the 30-year fixed loan at 6%, your monthly payment would be $1,439. If, instead, you got an ARM with a 5.25% interest rate, your payment would fall to $1,325 a month. That's an extra $114 a month, which equates to a weekly trip to the food store in my house. So that additional money can really help.
On the flip side, let's presume you got an ARM a few years ago to buy your dream house. Hopefully, by now, you've gotten a raise and you're no longer struggling to make ends meet. If you love your house enough to stay for the long haul, you might consider locking into a fixed rate now -- especially if your take-home pay is a bit higher than it was when you bought the house. In that case, you won't really notice the slight increase in the monthly payment as a result of the higher rate.
More importantly, you'll be able to sleep at night knowing that you're locked into a good rate, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research. No more worrying about what Mr. Greenspan is going to do.
Here's a big warning, though: Before you decide to refinance out of your ARM, pull out your loan documents and read the fine print. Many banks will hit you with a prepayment penalty that could be as high as 3% of the loan, says Gumbinger.
Although that penalty is tax-deductible, it's still going to come out of your pocket now. So make sure it's worth it.
It used to be much more advantageous for new home buyers to get an ARM to help their monthly cash flow. But the spread between ARMs and fixed mortgages is shrinking, says Spiegelman. The rates on ARMs have been going up while the fixed-rate loans have been holding pretty steady.
So if you're in the market for a new mortgage, run some numbers. Since the difference on your monthly payment between a 5.25% ARM and a 6% fixed loan is not that much, it might be worth tightening your belt for a bit. "If you can cover the nut, you'd be better off with a 30-yearfixed mortgage," says Gumbinger. That's because you're buying yourself 30 years' worth of stability for a mere 75 basis points.
So if you're buying a home in the near future, consider locking into the current rates. "It wouldn't take much for rates to run back up to 6.5%," says Gumbinger. Then you'll be kicking yourself for not acting sooner and locking in at 6%.
Granted, you need to consider your time horizon. If you know you'll only be living in the home for a few years, then by all means, save the 75 basis points in interest and get an ARM. But if you even think there's a shot that you may be there for 10 or more years, consider a 30-year fixed.
Spend a few minutes thinking about this because the odds are good that the rates are at the lowest they will be for a long time.
Let's face it, owning a home is stressful. Even the newest house on the block turns into the money pit at some point. So while you're up nights waiting for your roof to leak or your washing machine to go, having a fixed-rate mortgage might just be one less thing for you to worry about.