Although the temperatures may be low for much of the country, home sales are heating up. With homeownership on the rise, you may be wondering if now is a good time to buy a home, refinance your existing mortgage, or sell your home and move to a different one.
Whatever you decide, here are some tips for making the most of a mortgage in February.
Have a low, long-term rate? Don’t rush to pay off mortgage
It doesn’t take a crystal ball to know that the Federal Reserve is likely to raise interest rates again in 2018. Every time the federal funds rate is nudged higher, it can affect your existing debt. A quarter-point rate hike will boost the APR on your credit card, auto loan and any other debt you own that has a variable interest rate. Try to tackle your most expensive debts before they get even pricier.
“Don’t rush to pay down or pay off your low-rate, tax-deductible fixed-rate mortgage. Use the cash instead to pay off other higher-cost debt, or max out your tax-advantaged retirement savings accounts, like an IRA or 401(k),” says Greg McBride, CFA, chief financial analyst for Bankrate.com.
Have an adjustable-rate mortgage? Consider refinancing to a fixed-rate loan
That ultra-low interest rate you’ve been enjoying on your five- or seven-year adjustable-rate mortgage can and will change. When you enter into an ARM, you’re taking a gamble that rates at the end of that term will be about the same or possibly better than the rate you’re locked into for the initial rate term.
But, with rates expected to rise, chances are slim that you’ll be paying the same or less every month when your rate term is up. The average rate on a 5/1 ARM is 3.86 percent as of Jan. 31.
Mortgage Bankers Association Chief Economist Mike Fratantoni said recently at a conference that he predicts mortgage rates will rise to close to 5 percent in 2018 and will likely exceed that number in 2019 and beyond.
If you get stuck with a rate that’s a few percentage points higher when your initial term rate expires, it can mean that your monthly payments could swell by several hundred or even thousand dollars a month. And, the amount of interest you’ll pay over the life of the loan will balloon, too.
It might make sense to refinance your mortgage now into a fixed-rate loan before rates creep higher.
Don’t hold out for a price drop on the house you want
If you’re considering making an offer on a home, it may not make sense to wait and see if the sellers will lower their price. According to the most recent report from the Federal Housing Finance Agency’s Home Price Index, home prices have continued their slow but steady climb.
“Prices will certainly continue to increase, especially on the low end and midrange-priced homes,” says Lawrence Yun, chief economist for the National Association of Realtors, or NAR.
The number of available houses for sale nationwide is at its lowest level since NAR began tracking inventory in 1999. The scarcity of homes on the market means if you don’t pounce on the home you want, there’s a good chance it will sell to someone else.