Should You Wait For A Lower Rate To Refinance?

Should you refinance right now and take advantage of historically low rates, or wait for rates to go lower?

I’m going to answer that question today in today’s tip of the week, because we get this question every day in our office.

Does it make sense to get going right now or to wait? Rates might go down in the future, but we don’t have a crystal ball. We don’t know if rates are going to go down anymore, so I want to talk today about the opportunity cost, the cost of waiting to refinance, waiting for that lower rate and perhaps chasing a rate that you may never get.

Let’s use an example of a $400,000 loan. Let’s say that you owe $400,000 on your mortgage. If you lower the interest rate by one-eighth of a percent, so let’s say for example from 3% to 2.875, the payment is $28 a month lower. One-eighth of a percent equates to $28 a month lower. Now, let’s say you’re saving $200 a month by refinancing right now at 3%, which is a common savings that we see in our office, or more, but let’s just say $200 a month to be conservative. That means that if you don’t lock in right now at 3% and decide to wait, and it takes one month for rates to go to 2.875, that means that you have lost essentially $200 from not securing that rate right now. If you save $28 a month by that reasoning, it would take you seven months to recover that cost of waiting that extra month, because you had that one month where you didn’t have the savings.

Now, let’s take an even more extreme example. Let’s say it takes three months for rates to go down to 2.875. Well, now you’ve lost $600 in savings that you could have had by capitalizing right now on that 3% rate. That means in that example, it would take 21 months to recover that opportunity costs in the form of that $28 a month lower payment. This just illustrates the fact that, right now, we have historically low rates and there’s a cost to waiting and not securing the rate now. If rates go down even more, you could always refinance again. You’re not restricted on the number of times you can refinance, and we can look at low closing cost or no closing cost options, so there’s no break even point on the refinance.

If you have questions about your specific situation or want me to run numbers on it, I’m happy to do that, happy to answer your questions. It doesn’t cost a penny to call, so just give me a ring in the office. 303-670-0137 or baxterteam@fairwaymc.com