Rising rates mean it’s time to reconsider your mortgage

Depending on your loan, it may be a good time to refinance

The low interest rates of 2002-2003 helped spur a huge buying spree throughout the United States when it came to real estate. Interest rates in the range of 5% had not been seen since the 1960s, and buyers flocked to lenders to take out loans. This spurred the housing market, and home prices shot through the roof. In addition, millions of people also refinanced their mortgages, as the opportunity to knock a few percentage points off of your loan doesn’t come along all that often.

But not everyone chose to lock in at those low rates. The rising prices and low savings rates that are prevalent in this country meant that many buyers had to buy expensive houses with little in the way of down payments. So instead of taking out a fixed-rate loan, many buyers opted to take adjustable rate mortgages (ARM) instead. Those loans had rates that were slightly lower than the prevailing rates for fixed-rate loans, keeping the monthly payments affordable for people who otherwise might not have been able to buy the house they wanted.

It is those buyers who may have problems now. A number of those ARMs had short-term rates that held in place for three years and would adjust after that time to a prevailing rate. That’s a problem if you took out a loan in 2003 at 4%; rates aren’t that low anymore. And with the three year period about to expire, homeowners could see their rates jump to nearly 7.5%, an increase that could have a staggering affect on their monthly house payments.

If you have an adjustable rate mortgage, now would be a good time to consider refinancing to take out a fixed rate loan instead. Here are some things to consider if you currently have an adjustable rate mortgage:

• What determines your rate? That is, to what index is your rate tied?
• How often can your rate change? How much can it change at one time?
• What is the cap on the interest rate over the life of the loan?

These are things you should discuss with a lender. You may find that by refinancing and obtaining a fixed-rate loan now, your monthly payment may increase. On the other hand, it may not increase by as much as it may go up when your ARM adjusts. At this point, rates are poised to keep increasing for the foreseeable future. In that light, you may be well advised to lock up a fixed rate while you can.

Of course, there may be situations where refinancing right now does not make sense. This would apply if you aren’t planning to stay in your house for much longer. If you are going to move in the next few years, you may not recover the refinancing costs before you move. It also may not make sense to refinance if you have a large prepayment penalty on your mortgage. If you aren’t sure, discuss it with a lender. He or she can present the options that are available to you and you can decide what, if anything, to do next.