Five Ways Historic Low Mortgage Rates Can Change Your Financial Plan
Written by Martin Shields
The 30-year mortgage rate has dropped to its lowest rate since it was originally tracked starting in 1971 as shown in the graph below. Last year the 30-year mortgage rate was 3.74% and the most recent rate was down to 2.66%.
As rates continue to decline to levels we could not have imagined 10 or more years ago, the lens by which we make financial decisions has changed and there are risks we need to be aware of when rates increase. Below are five things to consider with these new low rates.
Now is the time to refinance – For most mortgage refinance decisions there is a breakeven point where the benefit of lower mortgages outweighs the closing cost for the loan. In most cases this breakeven point occurs when you can reduce your mortgage rate by more than 1% and this should be the case for most mortgages given the magnitude of the interest rate drop. This analysis assumes a closing cost of approximately $6,000.
Stretching Your Mortgage for 30 Years – When interest rates were above 5%, it usually made financial sense to keep the term of a mortgage as short as possible and to pay down a mortgage with extra payments. The reason for this approach is the concept of opportunity costs. Mortgage rates exceeded the annual rate of return of a diversified portfolio, making it beneficial to use excess cash to pay down a mortgage. Now with interest rates at historic lows there is a much higher likelihood of a diversified portfolio providing a rate of return that is greater than the mortgage rate over the long-term. This promotes the idea of taking a longer-term mortgage and investing any excess cash.
Buyer Beware – With interest rate being so low this can be a good time to be a home buyer, but it is also a time to take heed. With rates being so low, housing prices can get pushed higher. However, if rates were to move higher as the economy improved and the Federal Reserve changes their supportive approach, it is possible that housing prices could decline and buyers could find themselves under water with their mortgages.
Sellers’ Market – With interest rates so low and with buyers moving from larger cities, this a potentially a great time to be a seller. Many home sales are moving faster than normal and above asking price.
The Economy Will Keep on Humming – The housing market is a large part of the economy and when people buy or sell, they are spending a great deal before and after these transactions. A strong housing market is an indication of a strong economy.
If you have any questions regarding how to make the best decision with your mortgage and housing decisions, feel free to reach out to our firm.