By: Jason Russell
mortgage market update:
“The changing of the guard with a new Federal Reserve Chairman has ushered in a new era – along with further increases to the Federal Funds Rate, which directly affects Prime Rate.
The recent .25% hike is the 15th consecutive increase in rates, raising Prime Rate from 4% to 7.75% over the last few years. The Fed meets again next month, and it seems clear Prime Rate is headed to 8%.
The story hasn’t changed – keep an eye on your adjustable mortgages if you plan to stay in your homes beyond the time they will start adjusting. In the case of the HELOCs, those rates keep rising and rising – close attention needs to be paid here as well.
For those with adjustable rate mortgages or home equity lines of credit, long-term rates and fixed home equity loans are still at very attractive rates. These rates/payments are potentially higher rates that your current ARMs and HELOCs, but paying for security over the long haul can be as important as a lower payment in the short-term and can curb some sleepless nights. The best move if you plan on staying in the home for a few years longer is to think about refinancing into fixed-rate money.
That said, you don’t necessarily need a 30-year mortgage. 10 year ARMS are still very attractive, with rates in the mid 6’s. This rate is a little bit lower than a 30-year loan and you still have 10 years of fixed rate security.
For those with Home Equity Lines of Credit (HELOCs), the rise in interest rates has been more rapid as of late. If you can pay down your HELOC balances, this is your best option, otherwise – think about refinancing the debt into a fixed rate loan.
A Home Equity Loan (HEL) is basically a second fixed mortgage. Unlike a HELOC, where the payments start only once you draw from the account, a HEL gives you a lump-sum loan, and you must start making payments immediately, But, unlike a HELOC, the interest rate on a HEL is fixed — in this environment, it may be your best option.
The best case scenario occurs if the value of your property has increased to a point where you can take your 1st and 2nd mortgage balances, and combine the two into a new fixed rate 1st mortgage. Your new loan amount should not increase 80% of the new appraised value.
For example, If you bought your place for $100,000 and put 10% as a down payment – you currently have an $80,000 1st mortgage and $10,000 2nd mortgage (lower if you have paid down the balances). If the new appraised value is $115,000 or higher, you can take the $90,000 in total loans and get one new loan, which would be about 78% of the new value of the property.
There is a silver lining here – with the increase in interest rates comes increases in deposit accounts. Yields of 4 percent in short-term bank accounts such as money markets or 5 percent interest rates in short-term CDs are available in a variety of locations. “
Jason Russell
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