It’s no secret interest rates are the main driver of the nation’s loan volume. In the first quarter of 2016, mortgage refinances were 23.5% higher than the same quarter the year before (an eight-year high for an opening quarter). First mortgages also were about 10.3% higher than the year before, thanks to continued low interest rates.
Fixed-rate mortgages are currently below 4%. Here is why waiting for a better rate could be a risky could move.
The Markets Will Continue to Move
The pricing associated with interest rates moves daily, in some cases multiple times per day. It is normal for a lender to be pricing out with a certain interest rate at 10 a.m., and then have a change that same day at 2 p.m., resulting in a different fee and cost structure just hours apart. The market is always moving whether you pull the trigger on a new mortgage or not. The takeaway here is to not get fixated on a particular interest rate in order to justify the entire transaction. Focus on the big picture.
Let’s say you’re eyeing a 3.625%, 30-year, fixed-rate mortgage and, for whatever reason, it takes you a couple of weeks to put together your financials to lock in an interest rate. The market moved and you end up with a 3.875% rate on a 30-year term instead. This is still considered a win.
(Mortgage tip: For every .125 of a percent on every $100,000 borrowed that changes the payment $7.25 per month. For example, the difference between 3.625% versus 3.875% on a $417,000 is $58 in payment difference.)
The Cost of Procrastination
The cost of procrastination can add up quickly.
When refinancing: Let’s say you stand to save $200 per month by pulling the trigger now using our example at 3.625%. Each month you don’t refinance, you are literally stepping over dollars. Six months of procrastination is equivalent to a cost of $600 just by waiting, and that’s if the move is in the direction you want.
When buying: Using our $417,000 example using a rate range between 3.625 to 3.875% the difference in rate over the term of the loan is $21,294 in interest. Moreover, when buying a home, the cost can add up as a difference in purchase price can sway buying power, which can result in property payment change.
What are rates going to do in the future? No lender has a crystal ball. If you are debating whether to buy or refinance a home, first thing to ask is “can I afford this new payment?” The second question to ask is “is this new loan truly helping me accomplish my larger financial goals?” Interest rate is important to both questions undoubtedly, but big picture should be the target.
The best time to take out a mortgage is whatever time you are in a place that you can justify the expense for the net tangible benefit. It is always the right time as long as you can afford the mortgage and you’re not throwing good money after bad. Let interest rates be a guiding factor only.
Also keep in mind that your credit report and any outstanding loans you have will be closely examined, so it’s best to have as high a credit score as possible in order to score a lower interest rate. (You can view two free credit scores, updated monthly, on Credit.com.)
A final thought: Your lender cannot control the time frame for how long you take in putting together your supporting documentation, or what your house appraises for. At the end of the day, ask yourself if the rate and cost structure you end up with still allow you to accomplish your goals. Let that be your guide to obtaining a great mortgage.