After a few years of record-setting low interest rates and a bustling homebuying market, you may be wondering if you’ve waited too long to buy a home – or if, on the other hand, you should wait even longer, in case future market conditions prove more favorable for your needs and circumstances. After all, no one likes the idea of missing out on potential savings down the road, should interest rates go down.
And while we understand that it’s natural to want to pick your moment, the state of the market when you close on your home might actually matter less than you think.
There are a variety of options out there that can help you adapt your home loan in the future, to ensure that you not only have your ideal mortgage, but that you haven’t had to delay your next chapter, or put off buying a home at what could have been the perfect time.
1. You can get an adjustable-rate mortgage.
A simple way to benefit from favorable market conditions in the future is to take out a mortgage that adjusts to the market automatically, without any effort on your part – otherwise known as an adjustable-rate mortgage (ARM).
Unlike a fixed-rate mortgage, in which your interest rates always stay the same, an adjustable-rate mortgage adapts to market conditions after an initial period of fixed-rate payments, often at a below-market interest rate. (This initial period generally ranges from 5-10 years, although it could be as short as a few months). After that, your monthly payments will align with the market, usually adjusting to current interest rates once a year.
ARMs can be a great choice for first-time homebuyers, easing them into the mortgage payment process with lower payments at the start, whatever the state of the market. If you’re expecting a financial windfall, or a higher salary in the future, an ARM will keep payments affordable until you get there – and if you plan to move or refinance before the initial low-interest period ends, you could pay be paying that same low rate the whole time you’re in your home.
So if you’re worried about the prospect of locking in your rate now, only to kick yourself as you watch interest rates go down in the future, an ARM can be a great way to avoid missing out on those interest rates, without having to go through the refinance process. Of course, there’s always the possibility that things don’t go as planned, but if you’re comfortable with a certain amount of risk, an ARM could be the perfect choice for you.
For more information on other mortgage options, including ARMs, see our post on types of home loans.
2. You’re always free to refinance.
Generally speaking, what is financed can be refinanced. There are a lot of misconceptions about mortgages, one of which is that a 30-year mortgage means a 30-year commitment, and that the terms you agree to when you buy your home are permanent and binding till the end of time. Certainly your home price will stay the same, but the amount you pay from one month to another can be adjusted in a variety of ways, as your personal economic situation, general market conditions, or both change over time.
Refinancing your mortgage is one of the most popular ways to make those kinds of adjustments, by replacing your current mortgage with a new one that’s better suited to your circumstances and needs. And there’s no legal limit on how often you can refinance your mortgage, although some lenders do have waiting periods between mortgage refinances.
Let’s look at some of the basic kinds of mortgage refinances.
As the name suggests, this is the kind of refinance where you benefit from changing the rate and/or terms of your original mortgage. One of the most common reasons for this is lowered interest rates; if you take out a mortgage with 5% interest, and interest rates later drop to 3%, refinancing at a new interest rate could save you thousands per year. You can also lower monthly payments by simply restarting or lengthening your loan term (as you’ll now owe less money overall). Or you could switch between a fixed-rate mortgage and an adjustable-rate mortgage, or between a private lender and a government-backed loan. You could also stop paying private mortgage insurance (PMI), depending on what kind of home loan you have and how much you’ve paid off.
A cash-out refinance is a smart way to borrow money, and take advantage of the equity you’ve already been building by making mortgage payments. For example, if you originally take out a $200,000 home loan and have paid $50,000 of it so far, you can take out a new mortgage for the total amount your home is worth, even if you owe less than that. So if your home value has remained stable over time (and remember, it may have increased), you can take out a new $200,000 mortgage, and keep the leftover $50,000. This can be a great way to meet other financial goals, like higher education costs, home renovations, paying off debt, or anything else that requires a new influx of cash.
Speaking of paying off debt, if you’d rather not have the temptation of cash in your bank account, you can also opt for a debt consolidation refinance, in which the leftover loan funds can go directly towards credit card debt, student loans, or other kinds of debt. This can not only simplify your financial situation by reducing the number of payments you need to keep track of, but can save you serious money if your mortgage interest rates are lower than those on your other debts.
On the other side of the coin, you can opt for a cash-in refinance, where you put more money into your mortgage all at once to lower your total balance. This may speed up your repayment schedule or qualify you for lower interest rates, as your loan-to-value ratio (the amount of your loan compared to the value of your house) goes down – which lenders generally love to see.
The process of refinancing your mortgage is largely the same as applying for your original mortgage, which means you’ll already be familiar with the process. That said, they’ll also have a similar set of upfront costs, like appraisals, application fees, and closing costs (though closing costs on mortgage refinances can be lower than first-time mortgages). If that’s starting to sound a little dizzying, there’s a wealth of refinance calculators and other online tools that can quickly give you a rough idea of what you’d be likely to save, though it’s best to speak with a financial advisor before making any final decisions. And at the end of the day, it’s important to remember that you’ll always have the option to refinance in the future.
3. You have personal reasons for buying.
As convenient as it would be, we all know that we can’t put our lives on hold until the stars align and circumstances are as favorable as they can possibly be.
Financial concerns are certainly important, but they’re just part of the larger picture – and another part of that picture is your reasons for buying a home.
Maybe you’re relocating for your career, downsizing, want your kids to start in a new school district, dream of a backyard so you can finally get a dog, or simply need more space; whatever the reason(s), your personal motivators for being a homeowner don’t go away when the market fluctuates.
And particularly if you’re renting now, there are a number of compelling reasons why owning makes more sense than renting – and not only because rental prices are currently rising at unprecedented rates. Visit our online brochure to learn more on the top reasons to stop renting and start owning.
For anyone considering homeownership, it’s more than understandable to be scanning market headlines and trying to pick your moment. Unfortunately, none of us have a crystal ball that will show us what the market will look like in the future. But what we do have is a variety of ways to adapt your home loan to fit your circumstances, whatever they may be, so that you can feel great about becoming a homeowner today.
Last Updated on October 26, 2022