Most investors have focused on the soaring stock market, but recent moves for interest rates have a lot more impact on the decisions mortgage borrowers have to consider. Whether you're in the market for a home now or looking for cheaper alternatives to a home mortgage you already have, it's crucial to be aware of the conditions in the mortgage market going into 2018. The following three issues are worth a closer look before the end of the year.
1. Buying big? Get your $1 million mortgage now
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For most Americans, the idea of ever owning a $1 million home might sound like an impossible dream. Yet in some high-priced real estate markets, even entry-level homes require you to think about a high six-figure mortgage.
The reason to get a move on and lock up financing on high-priced homes now is that potential tax changes could take away a key deduction on large mortgages. Under current law, you can take mortgage interest on loans as high as $1 million as an itemized deduction on your tax return. However, lawmakers are currently taking a closer look at that provision, with some looking to cut that amount to $500,000. Most of those watching tax reform in Congress believe that existing mortgages of $1 million will be grandfathered in, allowing them to claim their larger deductions even after the new rules affect those taking out new mortgage loans in 2018 and beyond. To be as certain as possible that you'll be able to get your full deduction, take a look at accelerating the buying process if you expect to borrow more than $500,000 on your mortgage.
2. Consider a reappraisal if it can save you on private mortgage insurance
Conventional wisdom used to say that you should expect to have to make a 20% down payment when you bought a home. Times have changed quite a bit, and it's now common to see much smaller down payments. However, the lenders who make loans with low down payment provisions also typically require borrowers to have private mortgage insurance. This coverage protects lenders if the value of the home goes down, but it's also costly, requiring an additional monthly premium payment from the homeowner. Typically, you'll have to keep the insurance open until your equity exceeds 20% to 25% of the value of your home.
In the rising real estate market of recent years, it's possible that even if your down payment was less than 20%, the value of your home might have gone up enough to make your outstanding mortgage less than 75% to 80% of its current market price. An appraisal involves additional cost, but if it helps save you from having to pay mortgage insurance sooner than you otherwise would, then it can be worth it to get the appraisal done.
3. Consider whether an adjustable rate mortgage is right for you
Now might seem like the perfectly wrong time to consider an adjustable rate mortgage (ARM). Yet even with all of the talk about rising rates, mortgage borrowers have actually seen a decline in standard 30-year mortgage rates over the past year, having fallen back below the 4% mark. Moreover, market-watchers now anticipate that the Federal Reserve could be extremely slow in raising short-term rates, and that could keep long-term rates in check as well.
It's true that ARMs involve risk, because if rates rise in the future, then your monthly payments will adjust upward. Yet the trade-off is that you can save on interest during the critical first years of your mortgage. Currently, ARMs that have a fixed rate for five years and then begin adjusting every year have an interest rate that's almost five-eighths of a percentage point lower than a 30-year fixed mortgage. Given that many homeowners end up moving or refinancing within five years anyway, the upfront savings with an ARM can sometimes outweigh any potential future risk. It all depends on your tolerance for risk and your desire to save.
Make a smart move
Doing everything you can to save on your mortgage is worth the effort, especially because such huge amounts of money are involved. Look at these three ideas and see whether they can help you save money on your home loan in 2018 and beyond.
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