Borrowing Strategies Have Shiftedby Tim Manni
For lenders and borrowers alike, the rules for purchasing a mortgage have changed. Today’s market conditions have done away with below-prime borrowers, and have forced qualified borrowers to adopt new strategies.
Paying up-front points isn’t necessarily a bad thing:
When interest rates were high, paying points didn’t make sense because borrowers were very likely to refinance after rates dropped. They wouldn’t hold their original loans long enough to recoup their up-front costs.
By paying up-front points (or fees) you are essentially reducing your interest rate over the entire term of your loan. With rates as low as they are, paying a point at closing could lower your interest rate by half a percent.
Declining home values could jeopardize your large down payment:
The traditional thinking was, “If you have the capital to commit, why not?” said Keith Gumbinger of mortgage research firm HSH Associates. “It will give you a smaller balance to pay off. But now, in light of declining home markets, not everyone would agree with that.”
These days most banks require borrowers put up a minimum 20% as down payment. If home values continue to drop precipitously, paying more than the minimum in an attempt to provide yourself with some fast equity might not prevent you from owing more than your home is worth.
Don’t balk at locking in a low rate:
When rates are falling it’s easy to wait on the sidelines for rates to drop even further. Many experts warn against this:
“We almost always recommend that if you have the numbers that make your deal work, then lock it in,” said Gumbinger.
His reason: Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get lower one because they waited.