The Cost Of Waiting
The prospect of saving thousands of dollars of interest and/or benefitting with cash out from the equity of your property is why you refinance in the first place. However, many clients I speak with voice a common concern when refinancing - costs. With a refinance being an important transaction, many hesitate to ensure that they are timing the market right and attempting to get the best deal. However, the reality is that the most expensive cost is that of waiting too long to complete the transaction in the first place!
The cost of waiting is not as tangible as an appraisal fee. Often times the cost of waiting is greater than the transaction costs involved in the refinance itself.
Let’s say you can refinance to a 3% rate right now. Your new payment would be $2,108 a month. You decide that you want to wait a month to see if rates go into the 2% range. Next month when we revisit the rates have increased and 3.25% is the lowest interest rate available. Your payment is now $2,176, $68 higher and you lost $816 in yearly savings in one month.
The cost of doing nothing, in this case, is higher than refinancing. While $68 a month or $816 a year may not seem significant, most loans are on a 30-year term. Let’s say you are in the home for just 5 years that equates to $4,000 in lost savings and that doesn’t include that interest you would have saved at a lower rate. If you do stick out the 30-year term that is $24,500 in savings not including interest that could have been put to a variety of things like paying off other debts, saving for college tuition or just having some extra money around for a rainy day.
You can see how that would add up and not necessarily factored in when you are making your initial decision. The cost of waiting potentially lost you $24,500 and that was just with a 0.25% increase in your interest rate. This cost only doubles/triples if the rate goes from 3% to 3.5% or 3.75% etc.
Now if the rates do go down, the beauty of refinancing is that there is no limit to how many times you can do it. You can take advantage of the money you have saved over the last 6 months to a year at the 3% rate and still get a lower rate.
So, if you are thinking about refinancing, think about the cost of waiting and how much money you are potentially losing by doing nothing.