Mortgage interest rates slowly ticked up in the month of January. For any borrowers that have been on the fence about refinancing, now is the time to act before they rise any further. Interest rates on a 30 year fixed mortgage, with a balance of $417,500 or less rose to 3.67% which is the highest they have been since September of 2012. FHA interest rates also rose to an average of 3.48%. These rates are still at historic lows but with a steady increase, borrowers that wait to refinance could miss the opportunity to save money.
If you are looking to refinance, and want an interest rate under 3%, consider using a fifteen year mortgage or an adjustable mortgage (ARM). A 15 year mortgage loan had an average rate of 2.97% in January and ARM loans had rates as low as 2.61%.
Interest rates make a big difference in the amount, or size, of a home a borrower can afford to purchase. For example a borrower purchasing a home in 2002 may have had an interest rate of 7% on a purchase price of $250,000 for 30 years. That payment would have been $1,663 principal and interest per month. Someone purchasing a home for $250,000 today with a 30 year loan could have a payment of only $1,146 per month. That is a savings of over $500 per month.
Borrowers that want to own their home free and clear can work with a mortgage lender to develop a plan and use today’s low interest rates to accomplish it. Using the above scenario a borrower could buy that home with a 15 year mortgage and have a monthly principal and interest payment of only $1,772. If you could afford to purchase a home in 2002, and are earning the same or more today, you can probably afford to use a 15 year mortgage to pay off your home in half the time.
Low interest rates do more than provide you with an inexpensive way to finance your home. They reduce your monthly payment to the point that capital is freed up in your monthly budget to pay for other things, save, or pay off your home. A mortgage loan, used wisely, can help position you for retirement and sending your kids to college. Many people can even purchase now for less than it would cost to rent. By purchasing a home with a clear plan to pay off the mortgage you will eventually have no monthly payment towards a housing expense. A 30 year old couple purchasing a home, or refinancing, with a 15 year mortgage could have their loan paid off by the time they are 45. That leaves an additional twenty years that the previous mortgage payment could be directed into retirement funds. If the $1,772 they were paying for the mortgage payment went into an unmatched 401k at an average return of 8% a year that couple would have almost a million dollars by the time they reached 65. By retirement age our example couple would have a home completely paid off and a million dollars sitting in the account ready to spend. Now that is the way to retire.