Should I consider an adjustable rate mortgage?

Anyone who’s ever shopped for a home loan knows they come in two main flavors: fixed rate and adjustable rate mortgages, or ARMs. While traditional 30-year fixed mortgages have long been a homeowner favorite, sometimes an ARM can be a smart move.

Here’s how ARMs work. For a period of years – usually 3, 5, 7 or 10 – the mortgage behaves like a standard fixed-rate loan. You’ll know your rate upfront and it won’t change during that initial period.

After that, your lender can adjust your rate, raising it if national rates have moved higher, or lowering it if rates have dropped. Therein likes the risk with ARMs since no one can reliably predict where rates will move several years in the future.

Of course, you’ll earn a trade-off in exchange for an ARM’s risk. You’ll notice that ARM rates are noticeably lower than 30-year fixed rates. So while they are less predictable over time, you’ll be guaranteed to pay a lower rate for the initial period.

That means an ARM could be a wise choice if you expect to stay in your home less than the number of years in the ARM’s fixed period.

But if your expectations prove wrong and you live in the home long enough to reach your ARM’s adjustable period, you’ll find yourself at the mercy of current market rates. Right now, rates are forecasted to be on an upswing given the Federal Reserve’s movements. But after that, it’s impossible to know where rates will be headed.

In the end, adjustable rate mortgages are an easy choice when you know you won’t live in your home for the long haul. But if you’re like the many homebuyers who aren’t sure how long they’ll stay, a fixed-rate mortgage can be the safer and more penny-wise move.

How to lower the cost of homeowner’s insurance

Many households receive their home insurance renewal notice and simply accept the price as is, assuming there’s nothing they can do to make things more affordable. But there are, in fact, several things you can try that may lead to cheaper premiums.

The top piece of advice is to shop around. Maybe you don’t want to get coverage estimates every year. But doing so at least every 2-3 years is a smart move, as you might find you can get the same coverage levels for less money, or can get a lot more coverage for the price you’re already paying.

Second, if you’re open to possibly changing companies, get policy estimates at a time when your credit score is as good as it will be for a while. If you’ve recently applied for credit and your score has dipped a bit, perhaps wait a few months to build your score back up again, as insurers consider your credit score when quoting a premium.

If you don’t already have your home and auto insurance with the same company, investigate how bundling the policies might reduce costs. When requesting quotes, also ask how premiums vary with different deductibles. Even if you’re uninterested in changing providers, you can consider raising your deductible at your next renewal to lower your existing premium.

Things you can do to make your home less of a risk for insurers are upgrade old plumbing or electrical, or install security measures like deadbolts and burglar alarms. And when possible, try to avoid filing claims for small issues, as your claim history can cause your rates to rise.

Lastly, you may be able to score a discount by paying your premium in one annual lump sum, or by paying with a check or auto-debit instead of a credit card.

How can I stop paying private mortgage insurance?

If you took out your current mortgage with less than a 20 percent down payment, you’re almost certainly paying for private mortgage insurance (PMI) every month. While PMI serves a welcome purpose for those who otherwise wouldn’t be able to buy a home, it’s an added expense that’s best dropped as soon as possible.

In essence, PMI is an extra fee homebuyers pay to make the lender willing to extend a mortgage when the down payment is small. If the homeowner defaults, private mortgage insurance covers most of the bank’s loss.

For any new or refinanced mortgage of more than 80 percent of the home’s appraised value, PMI is calculated during the closing process and generally broken into monthly amounts that are tacked onto the monthly mortgage payment. So when PMI can be eliminated, the monthly payment drops.

For conventional mortgages, the Consumer Financial Protection Bureau allows homeowners to request PMI elimination once their mortgage balance falls to 80 percent of the home’s value. This can occur over the course of normal mortgage payments, or more quickly if the homeowner makes extra payments. It can also occur if the value of the home has risen substantially due to market conditions or significant improvements made by the homeowner.

In order to cancel PMI at the 80 percent threshold, homeowners must make the request in writing, be current on their payments, and have a good payment history. They may also be required to prove there are no additional liens on the property, or to pay for a new appraisal.

There is one additional way to eliminate PMI, and that’s to simply wait until the mortgage falls to 78 percent of the home’s original value. At that threshold, lenders must automatically cancel PMI, though only if the mortgage is current on its payments.

Are mortgage points a good idea when rates are high?

Any time mortgage rates are elevated, it can be tempting to lower your new loan’s interest rate by buying mortgage points. But high rates now are also the reason you may want to nix the idea.

Mortgage points, also called discount points, allow you to prepay some of your mortgage interest at closing in exchange for a lower interest rate over the course of the loan. The cost of one point is 1% of the principal amount you are borrowing. So if your mortgage will be $300,000, the cost of one point would be $3,000.

As for what you get in return, a general rule of thumb is that each point you buy lowers your interest rate by 0.25%, though it varies by lender and loan amount.

Once you know what you’re being offered, an online mortgage calculator can help you determine how much you’d save each month with the lower rate, and therefore how many months it will take you to break even on the cost of the points. Once you hit that break-even point, each additional month you hold the mortgage means you are saving money.

Note that it’s how long you hold the mortgage, not how long you stay in the house. If you don’t expect to stay in your home for a while, you obviously won’t have time to earn back what you spent on points. But even if you do live in the house a long time, there’s another reason points may not make sense. That reason is refinancing.

The high rates that make buying points more attractive also make it likely you’ll refinance your loan at some point in the future, when rates ultimately move lower. And once you refinance, you’ll be ending your opportunity to recoup what you invested in those points.

What to expect from the Fed on 2023 interest rates

By Sabrina Karl

Last week, the Federal Reserve hiked interest rates another quarter percentage point. Added to eight previous increases, the Fed has raised rates 4.75% over the last twelve months in a bid to tame the highest inflation the U.S. has seen in decades.

Inflation is still a problem, but it has shown signs of slowing. And because Fed moves take time to make their impact, it’s been expected that the current rate hike campaign was coming to an end.

That’s still the expectation, but recent bank failures have complicated predictions. Before Silicon Valley Bank’s failure three weeks ago, market watchers predicted the Fed would raise rates by half a point. The financial sector turmoil, however, caused them to issue a quarter-point hike instead.

The question now is two-fold: how much further will the Fed take rates in 2023, and when might they begin to reduce?

Currently, CME Fedwatch shows a 50-50 chance between another quarter-point increase on May 3 and no increase at all. After that, some futures traders start predicting a Fed decrease in July, while a slight majority forecast a September reduction.

But not everyone agrees. Indeed, investment giant Blackrock publicly warned last week that bets on any 2023 Fed rate reductions are extremely premature.

At present, it seems likely the Fed rate peak for the year will be a quarter point higher than today. Raising by a half point before plateauing is not inconceivable, but is looking less probable.

As for rate reductions, they’re simply a big guess right now. As this last news cycle of bank failures clearly spotlighted, every Federal Reserve rate decision is made based on the freshest economic data and news. And what we know right now is not what we’ll know before each of the six remaining Fed meetings this year.