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Thursday, January 31, 2008

Direction of mortgage rates - helpful approaches

For consumers uncertain about the direction of mortgage rates, we suggests some helpful approaches.

1. For homebuyers not sure if they should “lock in” their payments, a variable-rate mortgage will allow them to monitor rates while having the option to convert to a fixed-rate mortgage. With a “closed” variable mortgage, the borrower would have to stay with the same lender when switching to a fixed-rate mortgage or be subject to a penalty. With an “open” variable mortgage the borrower is free to change lenders, which can give added negotiating power should they wish to change to a fixed rate.

2. For homebuyers wanting to go with a fixed-rate, a mortgage pre-approval with a rate hold offers some security in a shifting interest rate environment. A mortgage broker will often be able to obtain a rate hold for a 120 day period

“If rates for fixed mortgages rise during the rate hold, you have your original lower rate. If rates drop, you’ll benefit from the new, lower rate – the mortgage shopper can’t go wrong with this protection,” says Jim Rawson of Invis.

3. For homeowners currently in a fixed-rate mortgage, it can pay to fine-tune how they make their payments. Switching from regular monthly payments to accelerated bi-weekly payments can offer a way to pay down debt more quickly and save on interest costs over the life of the mortgage.

On a $200,000 fixed-rate mortgage at a now-competitive 5.99%, monthly payments would be $1,278.42. Over the 25 years of this mortgage the borrower would pay $183,529 in interest.

With the same mortgage but with accelerated bi-weekly payments, the borrower would pay $639.21 every second week, and save $33,923 in interest and pay off the mortgage in just 21 years.