Don't Wait Around For Mortgage Rates To Bottom Out.
A guest post from Mark Maimon of NJ Lenders discusses a little-known money-saving strategy of "interim refinancing" existing mortgage debt.
The word “refinance” all but disappeared from the vocabulary of real estate and mortgage professionals for a while there as available mortgage interest rates shot quickly up from the high-twos to the mid-sevens. But we are heading into a different environment now; just last week we saw the biggest weekly fall for years in the average 30-year fixed mortgage rate.
In this Angles guest article, mortgage professional Mark Maimon explores a way for existing mortgage holders to benefit from these changing conditions without having to wait around and try to time the market.
Market Expectations
Most people who took out a mortgage in the past couple of years are likely to have an opportunity to refinance to lower rates in the relatively near future. The current consensus in the mortgage industry and wider financial markets is that interest rates are going to slowly decline over the next 2-3 years when they will hit a new lower plateau.
Keep in mind that nobody can precisely predict where rates will bottom out or how long it will take to get there (or how many bumps we’ll have on the way down), but this is considered a likely scenario as inflation finally cools off.
The Dilemma
By the time you’ll know if we’ve seen the bottom with rates, it will already be in the rearview mirror. The dilemma you’ll have is deciding if you should refinance as soon as the rates are low enough to justify the costs or if you should continue to wait until rates reach that eventual lower plateau.
When doing a refinance analysis for a client, NJ Lenders looks at the cost of refinancing relative to the amount of savings you would have. From that we calculate a “break-even point” – how long it takes you to recoup the cost of the transaction.
If you plan to keep the loan for longer than the break-even point, then the refinance makes financial sense to proceed with. You’d think that refinancing twice during the period when rates are declining would be a waste of money, right? Well, not necessarily!
There are some downsides to waiting for rates to bottom out before refinancing, including:
There are no guarantees that rates will decline as much as the “experts” anticipate they will
If you wait for a bottom, you might completely miss the opportunity by waiting too long
You also miss out on savings you could have between when rates dip a little and when they hit a more permanent bottom
Recommendation
Did you know that you have the option to take a slightly higher than market rate on a refinance in exchange for lender credits toward the closing costs? In some cases, you might be able to cover the majority (or possibly even all) of the closing costs for the transaction.
This is what NJ Lenders recommends doing for the “interim refinance” you might consider while you’re awaiting rates to go down more substantially over a longer period of time.
By doing so, you would have a nearly immediate break-even point because the lender is covering the costs for you. You also ensure that you are going to have lower payments than you have now, regardless of what happens with rates over time. And even if you end up refinancing again a couple years later, you haven’t lost anything because there were very limited (or no) costs associated with the transaction.
Eventually you can refinance to your more permanent loan and lower your monthly payment more substantially if/when rates bottom out meaningfully lower over time.
An Example:
Here are the assumptions for this analysis:
$1 million loan
Initial Interest Rate of 7.5% (7.612% APR) = $6,992 per month
Market rate for a no-closing costs refinance 1 year later: 6.5% (6.618% APR) = $6,320 per month
Market rate after 3 years: 4.5% (4.616% APR) - $5,066 per month
Let’s look at the savings comparison over a 10-year period where you weigh the options where you wait for the 4.5% rate in 3 years to refinance vs. doing an interim refinance with the lender covering your closing costs and then refinancing to the same 4.5% rate:
Option 1:
Wait to refinance until rates hit 4.5% in 3 years:
Savings within 3 years: $0
Savings over years 3-10: $1,926 per month x 7 years = $161,784
Total savings over 10 years: $161,784
Option 2:
Refinance in year 1 at 6.5%, then refinance again in year 3 at 4.5%:
Savings within 3 years: $672 per month x 3 years = $24,192
Savings over years 3-10: $1,926 per month x 7 years = $161,784
Total savings over 10 years: $185,976
If you don’t do the interim reduced/no cost refinance, you’re paying your lender over $24k more than you would need to in just the first few years of the loan.
If you wish to explore this idea further, you can contact NJ Lenders today to discuss the numbers specific to your personal scenario. They’ll make sure you don’t give your lender a penny more than you need to!
Contact:
Mark Maimon SVP, NJ Lenders Corp .. Branch Manager | NMLS#3550
NY: (646) 330-4735
LA: (310) 341-3106
Fax: (516) 875-6594
Email: mmaimon@njlenders.com
Website: mmteam.njlenders.com
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