Whether to Start a Re-Fi or Not

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With mortgage rates so attractive, many people are thinking of a refinance. However, when rate blip up a bit, as they did this last couple of weeks, it dampens their ardor. And, frankly, the higher the rate, the less sense it makes.

For example, say you are at 6% now. If rates were to 5%, you save more than 1% and a refinance makes sense. When rates go to 5.25%, all of a sudden 25% of the savings have disappeared and it is less attractive.  What none of us knows is whether the increase was a temporary one and that rates will go back down OR if they are headed to 6%.

There are some people who won't head to town until all the lights have turned green. The rest of us know is that even if you could see all the lights, it doesn't make sense to wait. It's OK to start to head to town because you are bound to get there even if you run into some red lights.

In this case, you suspect that interest rates might drop below 5% again, at which point you would want to do it.  However, some people will want to wait until the rate actually gets to their target before starting the process. I think that's a mistake and here's why.

Longer lock periods have higher costs in terms of points. If you want to lock for 45 days it will cost more than if you lock for only 30 days. The cheapest lock period is 15 days, actually 10 days with some lenders.

Here's what a rate sheet might look like.

Lock Period     15 days  30 days  45 days  60 days

Points              1          1.375      1.625      2

Here's the rub. You can't lock in on the 15 day lock unless your loan is completely approved. Let's say it takes 20 days to get completely approved if you start today.  You can lock today at 1.375 points.  If the rates are the same 20 days from now, you only have to pay 1 point.  .375 points on a $400,000 loan is $1,500, a lot of money in my view.

So here's the way I look at it. If you lock when you start out today you pay $1,500 more than you would if you were ready to go. If you started 20 days ago, you would be able to lock at the 5 day price and save that $1,500. 

The risk is that you pay, say, $350 for an appraisal and if rates NEVER go down, you lost $350.  But you opened up the possibility that you could save $1,500.

To me, that is a no-brainer. Start the process now!

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