When to Lock That Rate

Unless you’ve been hiding under a rock this week, you’re aware that mortgage rates have moved sharply lower. I’ve fielded so many calls this week with questions, I thought it would be best to try and answer them here. Some responses are to questions, others are to statements that are just wrong. Feel free to share this with your family and friends…

I think rates will drop further, so I’m going to wait a while…
This is foolish thinking. Through all the years of rate cycles I have been through, the people that end up getting that cycle’s lowest rates were the ones that already had their application submitted along with all their paperwork. Those individuals were able to pull the trigger because their loan was already approved. They were able to utilize a shorter rate-lock commitment to obtain the best deal possible.

We just bought and/or refinance within the past year. Won’t the refinance costs offset any savings?
If you are in a higher interest rate loan, the best time to refinance that loan is as soon as possible. If you factor in the higher amount of interest you will pay over the life of your current loan, refinancing, even if your current loan is only 6 months old, still makes sense. Just make sure the closing costs are reasonable.

What are reasonable closing costs?
Every consumer will have a different idea of what “reasonable” is. But here is a way to think about it for your individual situation. Regardless of the rate you are quoted, or the points that lender is convincing you to pay, reasonable closing costs should not exceed a reasonable recapture time. Recapture time is the formula of taking the cost of the refinance and dividing that number by your projected monthly savings. There’s no right answer that fits everyone as to what’s the right amount of recapture time.

My opinion that I have shared consistently for the past decade has been: Obtain the lowest rate possible for the least amount of cost.

I’ve heard it isn’t worth refinancing unless my rate drops by 1% or more…
False! There’s no magic number that right for all loans. How much the rate drop must be in order to make a refinance a good idea is based solely on the size of your loan. It is easier to think of this concept using extreme examples. If you have a mortgage balance of $100,000, you will need a significantly larger rate reduction to show meaningful monthly savings versus a $1,000,000 mortgage balance. With the smaller loan, even a 1% rate reduction may not justify a refinance. Yet for the $1,000,000 loan, a reduction of only ¼% could be worthwhile.

Should I pay points to get a lower rate?
My opinion has always been generally no, but every situation is different. The deciding factor is recapture time. You must decide where the sweet spot is for your specific scenario. Here’s an example: If by paying points the recapture time is 8 years down the road, you must decide now if you are going to keep this mortgage for much longer that 8 years. 8 years is the point where the added costs are finally recaptured by that lower payment. If you decide to sell or refinance before that recapture period, you’ve thrown money away.

You cannot be influenced by the allure of that mythical low number! You must do the math! You must also take an honest appraisal of your future. I know there are lots of people reading this thinking this exact thought: I am never selling my home. Rates are so low, that this will be the last time I refinance. Even if my recapture time is 12 years out, since I am keeping this loan for 30 years, I will have a huge savings over time.

This dream may be a reality for some, but I’ve been originating loans for nearly a quarter century. In my time I have never met anyone – either in social circles or though my business, that kept their 30-Year Fixed mortgage all 30 years. It just doesn’t happen. Circumstances will create change. You may need to tap into the equity of your home for all sorts of situations, which would cause you to refinance. Or maybe you’ll decide to retire to the mainland or need to sell to move into an assisted living situation. Whatever the reason, I’ve never met anyone who was close to payment number 360, or even 300 for that matter!

I hope the above provides you some clarification on what to do given the current mortgage rate cycle we are in. Check the current rates, see what the costs are for your situation, get your documents gathered, and get your application submitted. The stock market will rebound. And when it does, mortgage rates will rise, and jump back up quickly!