John Adams: Home loan interest rates fall through the floor

By Special

For the AJC

In a remarkable turn of events that almost no one expected, the downgrading of U.S. Treasury debt scared stock market investors enough to cause many to move funds to a safer venue. But when they looked at the alternatives, the safest opportunity looked like U.S. Treasury obligations.

It's called a "flight to safety," and enough of it happened to cause rates to decline dramatically. As a result, borrowers in the past couple of weeks have seen remarkably low rates quoted on home loans.

The ever-popular 30-year fixed-rate loan recently dipped solidly below the 4 percent level, offering those who could qualify an unprecedented opportunity to lock in an ultra-low rate for the next three decades.

Just to give you an idea of the impact of interest rates on home ownership, let's look at an example.

For much of the year 2000, interest rates for 30-year loans hovered around 8.5 percent. If you borrowed $200,000 at that rate, your monthly payments of principal and interest would have been close to $1,538 each month. That same amount borrowed today would cost only $941. Over the life of the loan, that monthly savings amounts to more than $214,000, perhaps enough to fund a child's formal education or make a strong contribution to a retirement program.

Fifteen-year loans have recently been even lower, with rates only slightly above 3 percent.

That same $200,000 loan on a 15-year amortization would result in a monthly payment of $1,381. And while the resulting payment is not as attractive as the 30-year program, it saves you literally tens of thousands of dollars over your current loan and pays off in half the time.

Unfortunately, regulatory overreaction to the loose lending of the past decade has made it difficult to qualify for any loans and even harder to get the best rates. The disadvantage is most pronounced for those with small down payments, low credit scores or relatively high debt.

Likewise, if you have good credit but owe more than your home is worth, most lenders will not allow you to refinance to get a lower rate unless you bring cash to the closing table. But with rates this low, it might be worthwhile to consider doing just that if it is an option for you.

If you have less than 20 years left on your current home loan, and you can otherwise qualify, you may want to consider moving to a 15-year fixed rate. Depending on the rate differential, you could end up with lower payments and a shorter payback.

One more scenario might save you a bundle if you have less than 11 or 12 years remaining on your home loan, or if you are willing to pay more principal each month in order to get your loan paid off in 10 years or less.

If this describes your situation, look into a 7/1 adjustable rate mortgage (ARM) or even a 10/1 ARM.

These programs are usually set up as a 30-year fixed-rate loan, but after a set number of years -- for example, on a 7/1 ARM it would be seven years -- they convert to a loan that adjusts annually to whatever the current rate is at that time.

Rates are now ultra-low on these adjustable loans, but the secret is to pay off the loan before you experience the adjustable rate portion.

On the 5/1 ARM, rates have recently been solidly under 3 percent, a truly remarkable bargain.

On all these loan programs, you should be offered the option of paying a slightly higher interest rate and paying zero closing costs.

While some lenders act like this is a personal favor they are doing for you, the truth lies elsewhere. The higher yield creates a loan premium, which the lender uses to pay your costs.

As always, I recommend that you consult with your accountant before you sign anything, and I strongly urge you to compare loans from at least three reputable lenders based in Georgia. In my opinion, this is too big a purchase to handle over the Internet.

Finally, remember that interest rates can change very quickly, based on nothing more than a remark by Fed Chairman Ben Bernanke or a comment by the premier of China. When you find a rate you can live with, lock it in immediately and get it in writing.

John Adams is an author, broadcaster and investor. He answers real estate questions submitted through his website and in this column. For more real estate information or to make a comment, visit www.money99.com.