Why It’s Risky To Put Off Your Mortgage Refinance
Yes, you could gamble on mortgage rates going lower. But the odds are against you.
Mortgage rates are hovering around 4 percent, almost a whole percentage point lower than they were a year ago. For homeowners who got loans in 2018 or earlier, refinancing now could mean saving hundreds of dollars per month on your mortgage bill. Over the lifetime of your loan, that’s a huge amount you could pocket instead of giving to the bank.
For example, a $300,000 fixed-rate mortgage with a 4.93 percent interest rate costs $1,597 per month. If you were to refinance your loan with a 3.93 percent interest rate, your monthly bill would drop to $1,420. That’s $177 per month in savings or $2,124 per year. Even if it costs you 3 percent of the loan amount to refinance, which is $9,000 for a $300,000 loan, you’ll pay that off in less than five years, giving you more than 20 years in savings on your new loan.
When refinancing makes sense
Many experts recommend refinancing if your current rate is north of 4 percent, and if you can shorten the terms of your loan, even better.
“There are four components to what I call a ‘home run’ refinance: Is the interest rate lower than your current mortgage? Is your payment less? (It might be, but if not, and the loan works for your circumstances, that’s okay, too.) Is your term shorter? Are your closing costs manageable? If you get all four of these, it’s a home run refinance,” says Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask.”
Refinancing makes sense when you plan on staying in the house long enough to see the savings of the refinance. It’s important to make sure you’re not losing money on a refinance by selling your house before the closing costs of the refinanced loan are recouped.
Because refinances can be costly, somewhere between 2 and 4 percent of the value of your home, crunch the numbers to see when you’ll start saving money. It might take up to six years or more before you’re out of the red and the monthly mortgage savings begin to add up. But if you sell before then, you just made the banks richer without benefiting your bottom line.
“Rates will be somewhat flat throughout 2020. All consumers who have not refinanced and plan to remain in their existing home for five-plus years should assess refinance opportunities,” says John Pataky, executive vice president at TIAA Bank.
What if rates drop in 2020?
Homeowners who try to time the market in order to get the best rate can end up saving a lot of money or kicking themselves for years to come because they missed the boat. Even the most financially astute people among us get the market wrong or fail to see the iceberg beneath the water.
According to the CME’s FedWatch Tool, in mid-December there was a 60 percent probability that the Federal Reserve will lower its target Fed funds rate in 2020. This will likely lead to lower mortgage rates, says Robert Johnson, professor of finance at Heider College of Business, Creighton University. But relying on this speculation, as grounded in probability as it might be, requires someone with a low level of risk aversion, Johnson says.
“Risk-averse investors would likely want to refinance sooner rather than later, as while the consensus of the market is that rates may decline in 2020, they certainly could rise as a result of unforeseen economic developments,” Johnson points out. “Additionally, if rates do fall, they are unlikely to decline substantially. And, behavioral finance shows that people regret losses more than they savor gains. If one refinances and rates move lower, there is likely less psychological pain that if rates rise and people miss their opportunity to refinance.”
Homeowners should consult with a trusted financial adviser to discuss their financial goals before refinancing. It’s important to know exactly what rate you would need to lock in in order to benefit from a refinance.