Rates are hike by 0.5% so far during 2017, and could go even up. This increase in Fed rates raises the question among many of us whether it is a good move to purchase your rate down in order to have a check on your mortgage costs. To get an answer for this, let’s first review the current market outlook.
Where are rates headed?
In mortgage bonds, rates are connected to daily trading. Hence, rates will increase with the bonds selling on an improved economic sentiment which is what’s currently happening. On the other hand, the Federal Reserve keeps a check on short-term rates prevailing in the economy utilizing overnight bank to bank lending rates.
If they feel there is an improvement in the economy, they will increase these rates. In spite mortgage bonds denote longer-term rates, these Federal Reserve hikes will continue to fuel selling of credit, bonds, which lead to increase in the mortgage rates. With the optimistic lead of Fed’s economic tone, the mortgage rates will be increasing.
What is paying points?
Paying points, in other words buying your rated down refers to paying an additional fee along with the standard loan fees like underwriting, credit report and appraisal in order to achieve a lower rate.
How to calculate it?
In order to ascertain, whether if you should make paying points or not, calculate how long it will take for your monthly interest cost savings to settle the cost of the points. If you are planning to live in the home for more than four years, then it is recommended that paying the points is a valid decision.
On the other hand, it is also not advisable if you are getting a five year ARM and not a 30-year fixed, as the five year ARM would compensate to an increased payment just 1 year subsequent you broke even on paying points.
Dangers with paying points
Have a word with your lender and determine how long it will take for your interest cost savings from buying your rate down value to repay the points. If you are living in the home longer than this break even timeline, you may not lose money.
On the other hand, if rates come down after you make pay points, you will be under risk of losing money as you need to spend additional cost on a refinance in order to keep you in the market.
How can you know that rates disclosed to me is correct?
There is a Federal law that abides all lenders to furnish their clients with Loan Estimate Disclosure within 3 days of a complete loan application. In that Loan Estimate Disclosure, the second page specifies points related to Loan Costs on the top left section. This will denote the exact percentage of the interest for the loan amount for any quoted points. It also displays the amount of the points in dollar.