Handling Rising Rates

Rates have been low for a long time, but now they are beginning to rise again. We do not yet know whether the era of low rates is completely over. No matter what the current rates are, it is important not to panic. Rates can jump quickly then settle over a period of a couple of weeks, and rates are still relatively low. However, there are some things you can do to continue to save even with rising rates.

First, you can pay down your adjustable rate mortgage. By paying an extra $50 or $100 per month in principal at your current rate, you can minimize the payment increase if your rate goes up in the future.

You might also want to consider another loan product. If you can't afford a fixed rate mortgage, you might want to think about a fixed rate/adjusted rate hybrid. These loans work by offering a fixed rate for something like a five-year period, then a yearly adjustable rate from there on out. At that time, you might want to consider refinancing if rates are right.

You might also consider a buydown, but this option isn't necessarily recommended. Buydowns work by offering rates about 2 percent below the current rate for the first year, but which rise by a percentage each year for 2 years. The catch is the final rate usually ends up about half a percentage above the current rate. For example, if the current rate is 7 percent, you will start at 5.5 percent, go up to 6.5 percent the next year, and finally end up at 7.5 percent. Of course, you can refinance at this time if rates have gone your way.

You can always pay more points (one percent of the total loan value) to lower your rate. You'll need some spare money at the beginning for this option to work, but it might be worth it in the long term. Increasing your down payment is a similar option that can help you get a lower interest rate on your loan. Taking less time to close your loan (called the commitment period) might also result in slightly lower rates.

Finally, if you think rates may be lower by the time you close, but are afraid to take a real chance on it by letting your rate float, you might want to try a float down option. For a small fee, mortgage companies will let you have access to lower rates if they fall while setting the ceiling for your rate at the current rate level.