If you currently have a mortgage, what should you do before interest rates significantly increase?
The "when" related to interest rate increases has been the subject of debate for a while, but there is wide-spread agreement that rates will slide up. Whether that's slowly or quickly represents another debate.
Does the certainty of rate increases call for action from savvy property owners with one or two existing mortgages on their real estate?
While rates are near historic lows, refinancing to take advantage of lower interest rates may make good financial sense, but act soon. Combining existing primary and second mortgages into one loan may improve your financial situation and probably lower payments.
Mortgage contracts, which outline how much must be repaid to the lender according to specific terms, vary from lender to lender and from borrower to borrower, so do not assume anything about your mortgage. Read the mortgage documents yourself or contact the lender to clarify your obligations, rights, and alternatives.
This is a time of transition for the mortgage industry, so changes outside of your mortgage document may influence your borrowing options. You'll never know until you ask. No one will come knocking on your door to bring you up-to-date.
Homeowners with existing mortgages will be protected from immediate rate increases unless they have a variable-rate mortgage, also known as adjustable-rate or floating-rate mortgage. With these loans, the interest rate is not fixed, but fluctuates against a reference standard. Vulnerability to rising interest rates depends upon specific terms set out in mortgage documents. Talk to the lender for clarification of any unfavorable effects of rising interest rates and to understand your options.
Mortgages with fixed interest rates are not vulnerable to rate increases during the term or contractual length of the loan, which can be 6 months, 1 year, or decades long. However long the term is, eventually, the mortgage comes due and payable. That's when property owners and their mortgages are vulnerable to higher interest rates. If you must re-qualify for refinancing, significantly higher interest rates could pose qualification restrictions and limit the size of mortgage available to you.
Usually, re-qualification is low threat because, as the existing mortgage ages, the principal, or original amount borrowed, is paid down or reduced. Refinancing for a smaller mortgage at a higher rate should be affordable unless the property owner has had a change of employment or income.
Even if you expect to refinance with your current lender, shop around for the best rate and mortgage terms. Your current lender may decide to match the best offer you receive from a new lender to retain your business.
When comparing lenders with the help of a mortgage broker or contacting them yourself, ask questions about fees and terms like prepayment to be sure you are improving your situation by moving lenders. If you gain a half point or a point in interest, but face higher fees or less flexible terms, moving lenders may be an expensive decision. Real estate professionals are often excellent resources when dealing with mortgage issues.
Don't miss the chance to maintain your mortgage at a reasonable interest rate. Contact your lender if you are unsure about your vulnerability to rate increases. Once rates move up, "if only I'd…" recriminations will get you no where.