Refinancing: The Risks of Waiting

If you’ve been thinking of refinancing, the risks of waiting might not be worth it. Lately, it’s a good move to go ahead especially for those who have been on the fence over the past few months. The market has been relatively positive for interest rates as mortgage rates in general have been floating in a very tight range, having recently bounced off record lows. The Fed has stood pat for the past several FOMC meeting as well.

Mortgage Rates Might Jump

What are the risks of waiting? The biggest is rates moving to higher levels and never look back. Those of us in the industry can tell you that it takes forever for mortgage rates to move lower, but rates can jump in a heartbeat over the slightest, seemingly innocuous news reports. Conventional fixed rate mortgages are tied to mortgage bonds. And just like any other type of bond, when there is a demand for the bond, the price goes up which inversely affects the yield, or the rate of return. Investors pour money into bonds not as a vehicle for income but more importantly as a safety vault. Stocks can be volatile, but the returns can be greater. Conversely, stocks can also move down causing investors to lose money. Bonds provide protection for such volatility.

Economic Reports and Refinancing

Rates moving lower typically means a series of unflattering economic reports over a period of time. Rate volatility can also be impacted by geopolitical moves. Global instability can cause investors to get nervous, pulling money away from the stock market and into the safety net of bonds. Say for example, unexpected events in the Middle East can cause investors concern. Unexpected events in Europe or in any other region for that matter can have an impact on mortgage rates.

If something does happen that causes investors come concern, bonds will be in strong demand which pushes rates lower. But, when things settle down or continue to remain relatively calm, mortgage rates will continue to float in a tight range. If you’re waiting for rates to come down just a little bit further, just one newscast can spoil the rate party.

Another risk of waiting is the accrued cost of doing so. Let’s say that refinancing your existing loan will save you $150 per month. But you’re trying to squeeze out another 0.125% which would save an additional $15. I think you see the picture here. The risk of rates moving upward (remember, upward rate moves happen very quickly) while trying to eek out another $15 doesn’t really make sense. Each month someone waits that’s money out the window. Six months of waiting means $900 gone.

When Refinancing Makes Sense

There’s some math homework to be done here, homework that I can help you with. There will be closing costs on every mortgage, the difference is who is going to pay for them. With a purchase money loan, the sellers, the buyers or the lender can offset some or all of those costs. With a refinance, those costs belong to the borrowers. The easy math is dividing the monthly savings into the closing costs associated with getting the mortgage. The result is how many months it would take to ‘recover’ the closing costs in the form of the new monthly payment.

Further, there are other reasons to refinance besides getting a lower rate. Someone might want to refinance into a shorter loan term which saves on mortgage interest. Someone may want to refinance to get someone else off the mortgage and title, such as an ex-spouse. Maybe a balloon note is coming due and the existing loan needs to be replaced.

What’s Next

If refinancing now makes sense, then the prudent move is to move forward quickly. Get your application in along with the needed documentation so we can get your loan in a position to lock. One final note, if you go ahead and refinance in today’s market and a year from now rates fall far enough where it makes sense for another refinance, there’s nothing holding you back about refinancing yet again when and if they do.