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With Mortgage Rates Low, Tips from the Experts

Should You Be Taking Advantage of Low Mortgage Rates?

With mortgage rates hovering near their lowest levels in decades, you may be thinking about whether it's time to buy that new home or refinance your current loan.

Figuring out your mortgage options can be confusing, so here are some tips from financial experts.

Assessing Your Finances

Shopping for your first home is simultaneously thrilling and terrifying, even before you consider the financial aspects. Anticipating that you might be able to hunt for a home in a low-rate mortgage climate could be heartening as you assess your options.

"Lower rates mean people can buy the same home for a smaller monthly mortgage amount, or may be able to afford a slightly more expensive home," said Steve Hemperly, head of mortgage originations for JPMorgan Chase.

But rates are only one factor, Hemperly said, and it's important to consider your overall financial situation.

For instance, lenders often consider the effect the mortgage payment will have on your ability to pay your other bills each month.

Lori Atwood, a registered financial consultant, suggests taking a thoughtful look at all of your current obligations, as a lender will do, rather than focusing on one specific one.

"People worry about student loans when trying to get a mortgage, but banks are [often] more interested in monthly cash flow and not overall size of debt," she says. She suggests reviewing your total monthly debt payments to see where you stand and how much cash you might have available.

Adding a Mortgage Payment to Your Life

"You have to look at how your mortgage payment will affect both your cash flow (food, bills, etc.) and your static money (debt and savings), because it can affect them differently," she says, adding that a lower mortgage payment might help your short-term cash flow but cost you more in interest over the life of the loan.

When considering the effect of lower interest rates, keep in mind that what may seem like a small difference in the rate can make the total payments on a loan vary by many thousands of dollars. See an infographic with examples.

Depending on the amount of cash you have for a down payment, the lender may ask you to take out private mortgage insurance to get the terms you want. If that's the case, the monthly cost of that insurance will likely be considered in determining your monthly cash flow.

The bottom line, Hemperly says, is that a mortgage payment should be something you can handle comfortably. "You want to make sure you have enough disposable income that you can enjoy your new home," he says.

If You Think It's Time to Refinance

If mortgage rates stayed steady, homeowners might arrange a loan at the time of purchase and never think about it again. But when rates have fallen since you bought the house or last refinanced it, you may want to consider whether refinancing is in the cards.

While you're looking at rates, Atwood says, lenders will look at other things that may have changed since your purchase, including the value of your house, the balance remaining on your loan and your current assets and cash flow.

One thing to consider at the time of refinancing is the number of years during which you'll repay the new loan. If you took out 30-year mortgage a decade ago, you have 20 years of payments left. But a new 30-year mortgage restarts the clock, meaning you'll be making payments for 10 years more than you originally planned.

"I am a big fan of refinancing when rates drop," says Danny Kofke, a personal finance advisor with Invest-N-U who originally took out a 30-year home loan with a 6 percent rate. "A few years ago, we refinanced at a 3 percent rate. Instead of going back to a 30-year loan, we actually reduced it to a 10-year loan. Our monthly payment increased ... but we will be completely debt-free in seven years."

When deciding whether to refinance, Atwood suggests considering whether you're paying private mortgage insurance on the original loan and could now avoid it because your equity in the home has increased. She also says it's important to think about your long-term plans.

"Make sure you plan to be in your home for at least a few years before thinking about refinancing," says Atwood, who advises her clients to commit to at least a five-year stay. "No one knows the future, but try to look down the road a little and make sure you feel good about what you're committing yourself to."

Whether you're buying or refinancing, the goal is to balance your cash flow against your overall debt load, says Atwood. Lenders don't mind debt – let's face it, most people have at least some – as long as you can make the payments without struggling.

Considering a buying or refinancing a home? Learn more about mortgages from Chase.

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