Are Low Rates Inspiring Creative Solutions?
Low Rate Options
When it comes to paying interest on a mortgage loan, everybody likes low rates, that’s too obvious.
We’re going to talk about strategic decisions to take advantage of downward trends in long, and short term mortgage rates.
Even with all of the volatility, we are seeing in the world today, it’s not unusual to see low rates in the 3% to 4% range depending on what type of financing you’re using, what the loan amount is, and what your credit profile looks like.
Beyond the obvious great fortune of being in the right place at the right time lies the opportunity for you to increase your benefits by paying off your mortgage sooner, using lender paid mortgage insurance, and taking advantage of special “good credit” programs for those with scores above 720.
3 Creative Solutions
1. Flex Term Loans
A flex term loan allows you to choose the term of your own loan. One of the most frustrating things I see is folks that have been paying their mortgage payments for several years or more, the refinancing back into a 30 year fixed rate mortgage.
When you look at an amortization table, you will notice that for the first few years of the loan, you pay almost your entire payment toward interest. Fully amortized loans are uploaded with interest payments.
Flex term loans allow you to pick up exactly where you left off, if you have 264 months left on your current loan, let’s look at a 264 month loan, or better yet, let’s look at a 20 year loan (240 months) and see if there’s a further improvement in rates.
You will find your biggest interest rate price breaks will happen at 20 year terms, 15 year terms, and 10 year term. Anything in between uses the pricing for the next highest pricing point. For instance, a 25 or 22 year term is priced at 30 year pricing, the price drop happens at 2o years or less.
It is quite common that reduced mortgage terms will have low rates compared to longer mortgage terms.
2. Elite Credit LPMI Programs
For borrowers with credit scores above 720, some investors have very aggressive lender paid mortgage insurance programs that will allow as low as 5% down payment with no mortgage insurance payment, at an interest rate most buyers would love to have.
These special investors provide deeply discounted cost to including mortgage insurance in your interest rate. With a credit score above 740 or 760, I have seen interest rates as good, or lower than a borrower using conventional financing with a credit score below 699 or lower.
Lender paid mortgage insurance is available to most buyers, but it is often not cost effective if your credit scores are in the low 600’s. LPMI is also a very effective tool if you are having debt to income ratio issues. It’s not unusual to shave a few points off your debt to income ratio by taking advantage of lender paid mortgage insurance.
3. Adjustable Rate Mortgage
Don’t fear adjustable rate mortgages. These are powerful tools that can save thousands, to potentially tens of thousands of dollars for those that can think far enough into the future to plan.
The key to an adjustable rate mortgage is that you do not let it adjust. If you are confident that you will only live in this home for 5, 7 or 10 years or less, an adjustable rate mortgage might be exactly what you’re looking for.
ARM mortgages on conventional, high balance conventional, and FHA mortgages can offer significantly lower rates compared to a 30 year fixed rate. These programs are fixed at a low interest rate for a pre-determined period of time, like 5, 7 or 10 years.
Once this time period is up, the loan can adjust, either up or down, according to what the market is doing at the time. Many holders of adjustable rate mortgages in the past 8 years have seen the interest rates plunge to lifetime lows.
This strategy is perfect if you know you will sell this home a pre-determined period of time. Maybe you’re buying a condominium as newlyweds, and in 3 years you have 2 kids and you’re busting out of your little home. It’s time to move up.
If you bought that condo with a fixed period ARM, you would have saved a ton in interest. That’s a smart way to borrow money.