Making the Most of Low Mortgage Rates

According to Kenny Rogers in his song, The Gambler, “you gotta know when to hold ‘em, and know when to fold ‘em,” if “you’re gonna play the game” of poker. The same holds true for taking advantage of low mortgage rates. Considering that rates haven’t been this low in 50 years, it’s unlikely that you’ll see them again in your lifetime. In order to win at the mortgage rate game, you need to master the tricks to making the most of the current opportunity. You also need to know when to walk away before you get into trouble.

Missing the refinance opportunity

The most obvious way to take advantage of low mortgage rates is to refinance from an adjustable-rate mortgage (ARM) into one with a fixed rate.  What’s the potential trap that may stop you?  Looking at that adjustable rate, and believing it will last forever. Perhaps you think that only a fool would refinance into a fixed rate, which will most likely be higher right now. So why refinance?

The gambler says that “the secret to surivin’ is knowing what to throw away and knowing what to keep.” If you still have 10 or more years remaining on your mortgage, it may be time to throw away that adjustable rate, even though it currently looks like a winner. Why?  Interest rates are unlikely to stay this low forever.  When your adjustable-rate starts moving up, it’s a good bet that it will surpass the fixed rate that you can lock into now. Don’t get complacent with the way things are—focus on planning for the future.

Prematurely refinancing

While refinancing to a fixed-rate loan from an ARM seems like a no-brainer, it’s not right for everyone. First, you’ll incur closing fees, which can be substantial (3% to 6% of the loan amount).  If there’s a possibility you’ll be selling within five to 10 years, you may actually lose money if you don’t recoup those costs, and lose all the advantages of refinancing to a lower mortgage rate. Seriously contemplate the possibilities of remaining in your home. If there’s any chance you’ll be moving, you may want to keep your current mortgage.

Prepayment perks

In a low interest-rate environment, you’re not getting much return on your cash if it’s invested in CDs or money market accounts. One way to take advantage of mortgage rates is to send in a monthly prepayment of your loan, especially if you have a fixed rate. If it’s 5.5%, for example, you’re earning the equivalent of 5.5% interest each time you make a prepayment. Considering that CDs and money markets are paying well under 2%, you’ll be getting more for your money.

It’s generally not a good idea to bet on the direction that mortgage rates are headed. But in this low rate environment, it’s a pretty good gamble that they’ll be going up. By knowing when to refinance, or prepaying principal, you may, like Kenny Rogers, find an ace in your mortgage rate.