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Robert Smith

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4.5%? Gone with the Wind

02-25-09
Robert Smith

"No, I want to wait until they hit 4.5%"

I heard this more than once over the last month or so. I said to my client, "I understand, but what if rates go UP". There was a long pause over the phone. "What do you mean, Bob-that's not gonna happen"!

Well, guess what. I did happen. This client could have saved substantial money, but rates STILL haven't been as low as they were on the day we spoke. They weren't at 4.5%, but they weren't far off either! Rates have actually not hit that mythical number (at least not without paying hefty origination fees for it).

The lesson here: if you can refinance and save enough money to give you an attractive rate of return-DO IT!!! Other factors that could harm you if you wait. 1. Values could continue to decline, thereby making future refinancing more difficult. 2. Guidelines continue to tighten, also making future refinancing more difficult.

Really, the decision to refinance or not is simple math. Lets take this scenario:

Client took out a $150,000 loan two years ago at 6.5%, 30 year fixed. Payment is $948.10 P and I.

New loan would be 5.0% @ $151,000. New payment is $810.60. Closing costs are made up in about 1 year.

So, lets say client waited for rates to hit 4.5%, thus saving $183.01 per month The new payment would be $765.09. "What, Mr. and Mrs. homeowner, do you believe the chances are that they will hit 4.5%? "About 70% Bob, that's why I want to wait".

So, if his lofty estimations are correct (and they probably arent) then he will save $183.01 per month 70% of the time and will save ZERO 30% of the time. Keep in mind he would save $137.50 100% of the time by moving on the 5% 30 year fixed. So,

$183.10 savings x 70% (likelihood of success) = $128.17 per month

$137.50 savings, 100% of the time= $137.50 per month

This also doesn't take into account the opportunity cost of waiting 2-6 months to refinance ($137.50 per month) or again, the risk of waiting due to constricting guidelines.

So, if you can benefit by refinancing now, it may be in your best interest to act now!

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