Why Refinance Now If Rates May Drop Further?

August 18th, 2010

Conforming mortgage rates and FHA mortgage rates have remained below 4.5 percent through early June 2010. Since then, they have dropped considerably further. Did those who refinance their mortgages in early June, or earlier, make a mistake by not waiting? If you refinance today is it too soon because you may miss lower rates? Use a refinance calculator to help you answer this question.

Let’s assume that you funded a fully amortizing 30-year fixed-rate mortgage of $250,000 at 6 percent in April 2008 with a payment of just under $1,500. Did someone refinancing in June instead of August make a big mistake by not waiting for the market to drop an additional 0.25 percent? What about the homeowner who refinanced in September 2009 to 4.75 percent? Here are some calculations to show how long it would take to recoup the savings you would not have received if you had waited until now to refinance. We will assume your costs to refinance total $3,500 for comparative purposes.

Potential $2,400 in savings since September 2009

For this scenario the homeowner who refinanced in September 2009 at 4.75 percent refinanced a mortgage balance of approximately $243,000. The refinance lowered the monthly payment to approximately $1,250, a savings of $250 per month. From September 2009 to September 2010 this homeowner has already saved $2,400 ($200 x 12 months).

June refinance saved $750 but “lost” $1,800

For the homeowner who did not refinance last September but waited until June when rates hit 4.5 percent the mortgage balance refinanced was approximately $243,000 and the resulting mortgage payment was $1,250 per month, giving a savings of $250 per month starting in July on the current mortgage payment.

But the September refinancing homeowner had already saved $1,800 by June. By waiting, the June refinancer saves $50 more per month on mortgage payments, but lost $1,800 by waiting — it will take 3 years to make up in monthly savings what was lost by not refinancing sooner ($1,800 divided by $50 monthly savings). Essentially this homeowner takes a 3-year penalty by waiting to refinance.

September 2010 refinance saves $290 per month but….

By September 2010, which is when you would most likely close escrow if you start your refinance today, the September 2009 refinancer has saved $2,400 in monthly payments and the June 2010 refinancer has saved $1,000 in monthly payments. Refinancing this month your balance is approximately $252,250 and your monthly payment is approximately $1,210; a very nice $290 monthly savings off your current mortgage payment.

By waiting this long you have gained $90 per month by not refinancing last September and $40 per month by not refinancing in June. Was it worth the $90 gain to miss out on the $2,400 for the past year? It will take you over 2 years to make up the lost savings. Was it worth the extra $40 per month to miss out on the $1,000 by not refinancing in June? It will take you just over 2 years to make up those lost savings as well.

Refinance calculators can help you determine how much you can save by refinancing today, but also tell you how much you are missing out on by waiting perhaps 3, 6 or even 12 months for potentially lower interest rates.

The critical word in that last sentence was “potentially.” Those who have waited this deep into the low interest rate market we have been enjoying have seen rates drop. Will they continue to do so and for how much longer? Remember we will not know when the bottom has hit for mortgage rates until after the bottom has come and gone. In the meantime, how much are you leaving on the table by not starting your refinance today? Use the free mortgage calculators to help determine your savings.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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