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Interest Rates Drop in 2016?

5 Ways to Take Advantage of Low Interest Rates

Rare Rate Drop

The reality of mortgage rates is that they change every single day.  The ability to get the lowest interest rate available is usually a matter of timing, luck, and education about what drives rates.

As a mortgage professional for almost 20 years, I can tell you that the first two factors are usually the most important.  Understanding what drives rates is more valuable as a way to explain what the heck just happened, as opposed to being able to predict what interest rate are going to do in the future.

This is the general rule, until something comes along and breaks all the rules….like we are seeing now.

Rates have dropped to their lowest point since February 2015, and it’s only hit this low of a point a couple other times in the past decade.  What’s most interesting about this fact is the reason behind why we are seeing rates drop today.

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The Economy and Interest Rates

As you know, there is always news about the Fed raising interest rates.  While these rates are not mortgage rates, they are an indication of whether or not the economy is perceived to be in an inflationary, deflationary, or no growth status, and it does indirectly affect long term interest rates.

Every time the Fed says that the economy is showing signs of recovery and that we need to raise interest rates to stem inflation, they end up back peddling and leaving rates the same.

If you look at the global economy, many Countries are in a negative rate environment, which means that if you want to put your money into the bank, you actually have to pay the bank to hold your money for you!  Can you imagine?

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Economists like John Mauldin are warning us to be prepared for the fact that no matter what they say on the news, the numbers are pointing suspiciously toward the U.S. economy sliding dangerously toward a deflationary economy, or worse, a depression that will rival what we saw in 2008.

The underlying conclusion that he, and others have come to, is that this will cause long term mortgage rates to go down.  The exact reason for rates dropping is something we’ll tackle in more detail in the upcoming weeks.

The fact is, rates are dropping now.  How much lower will they drop?  That’s to be seen.

How to Take Advantage

Being a homeowner is a huge advantage when trying to take advantage of interest rate volatility.  As a home buyer, you must have an accepted offer on a home, and be in escrow before being able to take advantage of a drop in rates like we’re seeing now.  This is much smaller window of opportunity.

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FHA Streamline Refinance

FHA mortgages have the built-in benefit of allowing you to do a “streamlined” refinance at any time as long as the in the result of the refinance is that you will realize a minimum .50% reduction in your interest rate.

How to Qualify for a FHA Streamline Refinance

  • Borrower must realize a minimum .50% reduction in interest rate – (as of 11/2016)
  • There must be a minimum of 6 payments and be 6 months made on “new” FHA mortgages before being eligible for refinance.
  • There may be a minimum credit score requirement – my company will go down to 580.
  • You must be employed – Income verification is not required.
  • Your loan amount cannot increase more than the amount of the new Up Front Mortgage Insurance.
  • Refinance can only reduce rate or term, cash out is not allowed.
  • Appraisal not required under most circumstances.
  • Single families and Duplexes allowed.
  • Owner occupied and non-owner occupied properties allowed.

VA Streamline Refinance

How to Qualify for a VA Streamline Refinance

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Qualifying for an Interest Rate Reduction Refinance Loan is actually pretty simple.  For the most part, as long as you do not have any major credit challenges and you’ve made your mortgage payments on-time, you will find this process pretty easy.

Credit Score – 640 minimum credit score for loan amounts up to $417,00.  A 660 credit score is required for loan amounts above $417,000.

Mortgage Payments – Your mortgage payments must have been on-time, and show 0 x 30 days late for the last 12 months.  If you’ve made payments late, but not greater than 30 days late, and it does not show as 30 days late on the credit report, then you are eligible for a streamline refinance.

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New Mortgage Payments – Your new mortgage payments must be less than what you are currently paying to be eligible for this refinance.  Cash out is not allowed.  A VA Streamline refinance can only be used to save you money by reducing your rate, payment and/or loan term.  If you reduce the term of your loan, your payments cannot increase greater than 20% from where they were at the longer term.

Occupancy Requirement – Owner occupied homes are eligible, as well as Second Homes or Investment properties with VA financing as long as you can provide a letter of explanation and proof that the home was your primary residence at one time in the past.

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Reduce the Term of Your Loan

This is an often overlooked option that could result in tens of thousands of dollars in savings over the term of your loan.  The reason this is overlooked is that by reducing the term, you typically will not see a reduction in payment, in most cases it will increase.

When you calculate the interest savings by paying off the home sooner, you may find the motivation you need to adjust your monthly expenses and take a much more long term investment approach to your home loan.

Consider an Adjustable Rate Mortgage

If you fairly certain that you will not live the rest of your days out in the home, or in the loan that you currently have, this is a great time to look at an ARM mortgage.

I’m not suggesting that you put yourself in a position where your interest rate could change every month.  ARM mortgages typically will be fixed for 5, 7 or 10 years, then adjust after that.

If you think you will be changing your housing or financing situation in the next 5,7, or 10 years – take a look at the numbers.  You might be surprised at the options available to you.

Bonus Option

Of course, you don’t have to have a FHA or VA loan, or reduce the term of your loan to take advantage of low interest rates.  Paying off high interest credit card or student loan debt, or simply doing a rate and term refinance to lower your interest rate to today’s low rates are always options when there is a shift in the market like we’re seeing now.

It doesn’t cost you a dime to do the math.  Are you curious about your options?

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About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Diraj Singh says:

    Great information to grasp. Thank you. However, since I have just been approved for refinance at 3.125% from 3.625,and from 30 year to 15 years term, with increase in payment of about $232,should I go ahead or ask for even a better rate since rate changed yesterday. Seek your advice.

    • Scott Schang says:

      Hi Diraj, when the Fed lowers rates, it does not lower mortgage rates. 3.125% is a really good interest rate, it wouldn’t hurt to ask them if the rate is locked or not.

      If your interest rate is not locked in, you can ask the bank if rates are lower than 3.125%, but I highly doubt it. And if your rate is locked, which it most likely is, then you didn’t get hit when rates when up last week.

      It sounds to me like you’re in great shape!