If you’re in the market for a new home or thinking about refinancing, I have one question for you: What are you waiting for? I’m talking to those of you who are waiting for interest rates to get better. Interest rates are at historic lows, and sitting on the fence may cost you money.
Okay, I’m a mortgage professional, so I admit I have a vested interest in you making a decision. However, if you’re really going to purchase a home or refinance, it matters not to me whether you act now or act later. (I would like to do business with you either way.) However, it should matter to you. Acting now may save you money.
Let’s suppose you’re thinking about buying a home. The home’s price is $200,000, and you’re prepared to put down $10,000 towards the purchase. Today’s 30-year conforming rate is 4.75%, which equates to a $991 mortgage payment. If you’re paying $1300 in rent each month, your “housing” payment would be $309 dollars less if you buy now.
You may have heard that the Federal government is considering incentives that might drop rates to 4.5%. Does it make sense for you to wait?
Consider this. Any program the government offers is probably 3 to 6 months out. (Let’s use 6 months as we’re talking government time.) If you buy now, in 6 months, you will have saved $1854 on your housing payment. Yes, if you wait for that 4.5% rate, you can lower your monthly payment by another $30, but:
- If you find a home you like that’s priced right, is it worth the risk losing it?
- What if rates don’t drop?
- How long will it take to recoup that $1854 you could have saved?
You are correct to point out that I haven’t considered property taxes and insurance, which will reduce your savings. But I also didn’t consider the tax benefits of owning. On balance, if you buy now and live in the home for 7 years, I calculate you will save over $27,000 by buying over renting. (Please check with you tax professional about the tax benefits of home ownership.)
Suppose you’re already a homeowner, and you’re thinking about refinancing. Should you refinance today or gamble 6 months for that 4.5% rate?
Let’s say your loan balance is $200,000 with an interest rate of 6.25% – a pretty good rate last year. If you refinance today, your monthly mortgage payment would drop from $1231 to $1043 – a $188 savings each month. If you wait for 4.5%, your monthly payment would be $1013. Here’s the question:
In 6 months, you will have saved $1128 if you refinance today. If you wait 6 months to get that 4.5% rate (and remember, there’s no guarantee rates will drop), it will take 38 months – more than 3 years – before you recoup that $1128. (I’m assuming you have sufficient equity in your home to refinance.) Which makes more sense to you?
Of course, these are only examples, and in both cases I’m assuming you qualify for the loan. The point I want to make is that waiting involves risk AND cost. Rates are really low today. While they may get lower, they also may get higher. If you’re ready to act now and decide to wait, you’re not only risking today’s really low rate, but you’re also giving up guaranteed savings.
(You can run your own examples using the calculators on our Web site, www.LoneStarLending.com. Just click the “Calculate Payment” button in the left margin.)