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What impact does a lower interest rate have on my monthly payment?

Back in March, I wrote about interest rates being relatively low despite what experts had predicted at the beginning of the year.  At that time, they were averaging around 4.5% on a 30yr fixed with no points.  As we entered the summer, many had assumed that, at best, rates would remain the same or perhaps tick up a little bit.  Some experts even predicted we would be pushing near the 5% range by the start of summer.  However, now that summer has officially begun, I am happy to report that most of the experts were wrong and, not only have rates not gone up but they have actually dropped in the month of May.  On May 30th , we saw the 30yr fixed rate drop to 4.125%, which is the lowest it has been in over a year.  What has caused the drop? There are numerous things to which it can be attributed but I believe the two main factors are the high unemployment rate and the conflict going on between Russia and the Ukraine.

So, what does this drop do to a mortgage payment if you were to refinance or purchase a new home?  If we take a mortgage loan amount of $350,000 and use a 4.5% rate then the monthly mortgage payment would be $1773 for the Principal & Interest.  Dropping the rate to 4.25% would lower the payment to $1721, which is a $52 a month drop in payment.  If the rate was 4.125% then this would lower the payment to $1696, which is a $77 a month drop in payment.  That is a savings of almost $5,000 during the first five years of the loan and over $27,000 over the life of the loan!

The sudden drop in rates is also giving consumers the option to finance their mortgage on a shorter term.  Typically, the shorter the term you take the lower the interest rate will be.  For example, a 15 year mortgage which was around 3.75% back in March is now at 3.375%.  The 15 year definitely carries a higher payment which if we used the same loan of $350,000 and a rate of 3.375% the monthly payment would be $2480.  The payment is $784 higher than the 30yr mortgage but the reward is great for those that can afford it.  Not only will you pay off your mortgage in half the time but you will also save approximately $164,000 in interest over the 15 year period!

What if you only plan on living in the home for 5 or 7 years? If this is the case, then you may want to consider a 5 or 7 year fixed rate, also known as a 5/1 ARM and 7/1 ARM.  The 5/1 ARM is currently sitting at 3.25% and the 7/1 ARM is at 3.375%.  On a $350,000 mortgage the monthly payment on a 5/1 ARM would only be $1523 and on a 7/1 ARM it would be $1547.  These are the lowest payments out of all the scenarios but I would only recommend these to a client if they were certain that they would not reside in the property longer then the respective term of these fixed rate mortgages.

As you can see, there are many options out there and with rates dropping like they have recently it makes the home buying process more affordable for those looking to finance it.

If you have any questions about this topic please do not hesitate to contact me. To learn more about our company and mortgage products, please feel free to call Dan Longman, President of Priority Lending Corp, at 954-438-3776 ext.11 or email me at prioritydan@bellsouth.net. Visit us online at www.prioritylendingcorp.com

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