OCEAN CITY – Interest rates are going up — probably not within this year, maybe not even in the next. But at some point in the upcoming 24 months, says Larry Washington, Managing Director and Head of Merrill Lynch Home Loans, the rates for home mortgages and other loans will likely start to rise from their current historic lows. "It’s inevitable," according to Washington.
For anyone who owns or is in the market for real estate, this combination of record low rates and all-but-certain hikes on the horizon may create a rare opportunity to optimize borrowing costs and, ultimately, the value of investments. "We believe that this a great time to take advantage of the current rates and prepare for the higher rates to come," Washington says.
Earlier this year, it looked as if higher rates might already be at hand. The Federal Reserve Board increased its overnight funds rate, one of the key benchmarks that helps determine the rates for U.S. loans. More (and more substantial) Fed hikes were expected to follow, but then the Greek debt crisis hit, and signs emerged that the U.S. economic recovery might be slowing. Investors’ flight to safety pushed down the yields for U.S. Treasuries, another key rate driver, particularly for fixed-rate mortgages.
Still, Larry Washington is encouraging borrowers to use this added time to analyze their mortgage financing and make sure it’s as well positioned as it could be. He says the strategies break down into two basic categories: "defensive" maneuvers designed to limit the impact of the eventual hikes, and "offensive" moves that may allow you to squeeze even more value out of the rates being offered now. Here are some approaches to both strategies.
Depending on their type of mortgage, existing mortgage holders may want to take advantage of the current low-rate environment to reduce their current monthly payments — or to guard against the potential payment shock that could result from a rate increase.
For those with fixed-rate mortgages, the issue is fairly straightforward. If their mortgage was created as recently as three years ago — when rates for fixed loans averaged more than a full percentage point higher than they do now — they may want to consider refinancing their mortgages at today’s lower rates.
People with adjustable-rate mortgages, or ARMs, have other factors to weigh. If they have an ARM — in which the rate is adjusted periodically (usually once a year), based on the prevailing funds rate or another major index—their best option might be simply to do nothing.
But some borrowers have another type of ARM, known as a term adjustable-rate mortgage. This mortgage has a low fixed rate for an initial period (generally 2 to 10 years), then converts to an adjustable rate tied to one of the benchmark rates plus a premium for the remaining term of the loan.
There is also the interest-only mortgage. Depending on the rate at which the interest-only mortgage was set, homeowners who carry these loans may consider rolling it over into another interest-only loan at today’s lower rates. But there’s not a lot of time left for homeowners to make this move.
There’s also another way that Larry Washington has been encouraging clients to leverage today’s rates. For anyone contemplating a second or retirement home, now could be a very good time to buy. "We’re not necessarily calling a bottom to home prices," says Washington. Prices could still slide lower, particularly in parts of the country with a large "shadow foreclosure" inventory of homes. "But prices are low now," he says, "and interest rates are really low. And that can be a very powerful combination."
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)