The national average rate for 30-year mortgages fell below 6.2% in October, which is near the lowest rates ever reported, according to www.bankrate.com. “If you already have a home mortgage, this is an ideal time to refinance,” says Stephanie Simon, vice president of emerging markets at Wells Fargo Home Mortgage (www.wellsfargo.com), from her firm’s Silver Spring, Maryland, office. “If you’re not a home owner, lower mortgage rates make buying a home more affordable.” You might also get more home for your dollar. Either way, you have many mortgage options to choose from. “A 30-year fixed-rate loan is the most popular mortgage term people are choosing,” says Simon. “However, many borrowers are choosing 10-, 15-, or 20-year mortgages instead. The rates are a bit lower and you might save tens of thousands of dollars in interest payments over the life of the loan.”
Yet another alternative is an adjustable-rate mortgage (ARM). “Our most popular adjustable-rate loan,” says Simon, “is the 5/1 ARM, where the initial rate changes after five years, then is adjusted annually. Going from a 30-year loan to a 5/1 ARM might cut your rate by around 0.5%, so this is a good choice if you don’t expect to be in the home longer than five years.”
HOME EQUITY LOANS
These lines of credit are secured by your home. Recently, the national average interest rate on such loans was around 7.5%. “The interest you pay is tax deductible in most cases,” says Greg McBride, a financial analyst at Bankrate.com, based in North Palm Beach, Florida. “That’s not the case for many other types of loans, such as auto loans and credit card debt.”
Some homeowners apply for a home equity loan (HEL), then use it to pay off other debt. If your effective tax bracket is 30%, for example, paying 7.5% on a HEL is like paying 5.25% (70% of 7.5%) after tax, a much better deal than paying 8% or even 14% on other loans. “The danger,” says McBride, “is that you’ll extend the term of your debt by going with a HEL. If you were on a schedule to pay off your credit card debt or your car loan in three years, keep up those same payments after you switch to a home equity loan.”
These fixed-rate loans generally are repaid in three to five years. “Rates have come down,” says McBride, “but refinancing might not be the best move. You may be going from a new car loan to a used car loan, which [typically] has higher rates.” Recently, new car loans averaged below 9%, while used car loans were nearly 10%.
If refinancing a new car loan doesn’t make sense, consider paying it off with a lower-cost, tax-deductible home equity loan. McBride says you should pay it off, even if you have to prepay with extra cash. Paying down a 9.5% car loan is the equivalent of earning 9.5%, after tax: Where else can you find a deal like that today?
What’s more, now may be an excellent time