If you’ve been thinking of refinancing lately, as many certainly have, it might be a good move to go ahead and make the move. 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. If you’re thinking of refinancing, there are some risks of waiting.
What are these risks? The biggest is rates moving to higher levels and never looking back. 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. Bonds aren’t there to provide a healthy rate of return but a healthy dose of safety.
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.
If something does happen that causes investors some 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 on an upward trend. If you’re waiting for rates to come down just a little bit further, just one news event 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. There really aren’t any ‘do-overs.’ Waiting a few months just to squeeze out just a little bit more could cost you. Even the savviest of economic advisers can’t accurately predict the future.
There’s some math homework to be done here. 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.
If refinancing now makes sense, then the prudent move is to move forward quickly. Get your application in along with the needed documentation to 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 yet again for another refinance, there’s nothing holding you back about refinancing all over again.