Economic news continues to be gloomy, undermining our hopes for a strong recovery.
As a result, mortgage rates went down instead of up, as many experts had predicted. That’s good news if you’re shopping for a loan, but still it poses a tricky question: Are you better off waiting for rates to fall further?
There probably isn’t that much to lose, since it seems unlikely rates will rise anytime soon. More economists are talking about the danger of deflation — persistent, across-the-board price declines — and Tuesday the Federal Reserve announced a new plan to keep rates low by purchasing Treasury securities.
On the other hand, waiting to apply for a mortgage doesn’t guarantee big savings. Currently, the 30-year fixed-rate mortgage charges a mere 4.6%, according to the BankingMyWay survey. That’s as low as it’s ever been, and we’re at the edge of the known universe, knowing nothing about what’s on the other side. Could the rate sink to 4% — or even lower than that?
There’s no way to tell. But we do know the rate is usually higher, often much higher than this.
The odds seem to favor higher rates over low ones. The Fed’s new efforts may keep rates low, but it can’t be certain the Fed will drive them down further.
For most mortgage shoppers, it’s probably wise to stop looking at rates and focus instead on monthly payments. At 4.6%, it costs $513 a month to borrow $100,000 on a 30-year fixed loan, according to the Mortgage Loan Calculator. If the rate fell to 4%, for example, the payment would drop to $477.
Yes that’s a 7% difference, and a $36-a-month saving could add up over time. But even if you had a $400,000 mortgage, the lower rate would only save you $144 a month. And this is an extreme case — it would be astonishing if the rate fell to 4%. It doesn’t seem worth holding out for small savings that are unlikely to materialize.
Consider that with rates at a more normal level of 6.5%, you’d pay $632 a month on $100,000. And rates have often been higher than that. Falling rates have already produced terrific savings.
Incidentally, you may be wondering why a 13% drop in the rate, from 4.6% to 4%, would reduce the monthly payment by only 7%. That’s because a portion of the payment goes to principal, which must be paid whether the rate is high or low.
Whether you are buying a home or refinancing, the big issue in mortgage shopping today isn’t the rate so much as qualifying. You’ll need a high FICO score — at least 720 out of 850 — to get the lowest rate. You’ll also need a down payment or equity of 20%, and can always enhance your approval chances by putting down even more. Just remember not to take on any new debts, especially credit card debt, while your application is in the works. That can be a red flag to scared lenders.
Use the search tool to track down loans with the lowest rates. Once you’ve found some good candidates, call the lenders for details on points, application fees and other charges. Skipping this step and simply going for the deal with the lowest rate could add thousands to your closing costs, wiping out the wonderful savings that today’s dazzling rates have to offer.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.