The High Cost of Waiting for Lower Mortgage Rates

Many of you reading this have been waiting for those government promised mortgage rates of 4.5%, or even lower.  Do you realize those rates may never come in actuality?  Can you comprehend how much money you are wasting by not refinancing or outright purchasing a property right now?

First, let's look at those of you waiting to refinance.  Since rates are currently around 5% and it usually doesn't make sense to refinance with less than a 1% drop in rate, let's put together a scenario.  You have a $200,000 loan at 6%, with monthly mortgage payments (not including taxes and insurance) of $1,199.  You are now faced with the dilemma of refinancing since rates dropped lower, down into the 4's, but you didn't take advantage of them and they have now risen to 5%.  You hear the media talk about lower mortgage rates, namely 4.5%, throughout the headlines and this causes you to wait longer in anticipation.  As we near the passage of a new stimulus package, along with headlines from the federal Reserve stating they will keep buying mortgage backed securities, you think to yourself that mortgage rates must be heading lower, so I will wait.

But how much money are you wasting while you wait.  Let's say that it takes 6 months to get rates that low (personally I don't think it will happen) and we will leave the tax benefits aside.  If you refinanced that $200,000 right now, your monthly payment would drop to $1,074, giving you an extra $125 in cash flow.  That $125 can go a long way to paying off high interest debt, or we can simply save it.  That means that 6 months down the road, you would have saved $750, right?  Actually it is more since when you have a lower interest rate, more money each month goes to the principal, so your savings actually are $1,000, even more if you invested the savings instead, which I highly recommend.  It would take you over 15 months to recover those losses if you refinanced into a 4.5% mortgage at 6 months.  And what if rates continue to go up?  How much more will that cost you in the long run?

What about those of you whom continue to rent, say at $1,000 a month?  If you were to buy a home with a $200,000 mortgage at 5% right now, your payment would go up, yes, to $1,074.  But what about the tax savings you gain, not to mention the equity building?  Let's take a look, of course I need an estimated tax bracket, so we will just use 25%.

If you were to buy the home now, your net after tax payments would go down to $865, yielding a savings of $135 each month.  You can adjust your W-4 form with your employer and start reaping that savings immediately as well, instead of lending it to Uncle Sam interest free.  So, in 6 months you would have paid down $1,457 in principal, plus had a net savings of $810, for a total savings of $2,267!!  Again, what if mortgage rates don't go down or even continue their climb?  Are you willing to risk those losses?

The reason I am writing this is not to get you to rush into taking on that new mortgage right now.  rather, this is to ignite in you the realization that every decision you make, even not making one, has a profound effect on your finances, especially when it comes to your mortgage.  Use your mortgage as a financial tool, and it can be the best investment you ever made.  Enter into a mortgage without incorporating into your overall financial and investment plans, it could easily lead to financial disaster, and you could become another statistic or part of the next hews headline.  I cannot stress the importance of seeking a genuine mortgage planner, and those are hard to come by as mortgage professionals across the country struggle to survive.