Waiting, waiting, waiting
Not every borrower follows economic reports so intensely to find out when rates will hit bottom. In fact, my guess is that few do. But there are home owners with interest rates that could use a refinance but are waiting until the Fed makes another move. Or something like that.
[note color="#f1ee8e"]How do consumers know when rates have hit bottom?
They donít. No one does.[/note]
Not your mortgage company nor your loan officer nor your father-in-law. But how do you know when to lock in your interest rate and move on with your financial life? If youíre the type that pores through financial data every day for rate hints; consider the potential cost of waiting.
For instance, letís say you have a 15 year fixed rate $300,000 loan at 4.50 percent two years ago. Youíve watched as rates move lower over the past 24 months but you want to hit the absolute bottom. Your monthly payment today is $2,294 with your 4.50 percent rate.
One year ago, 15 year fixed rates were 3.50 percent and your new payment would have been $2,144 for a savings of $150 each month. But, you knew rates would go lower. And you were right.
In December of last year, 15 year fixed rates dropped to about 2.50 percent, again a record low. Your new payment, if you refinanced, would be $2,000 per month. Not bad.
But youíre holding out, you know for a fact, sort of, that rates will go down another one-quarter of a percent. So you wait. You want to see a few more Unemployment Reports. You want to see the minutes from the last Fed meeting. Check that, the last two Fed meetings.
Youíre still holding onto your 4.50 percent rate and even though you can get a 2.50 percent rate, saving you nearly $300, youíre waiting for 2.25. A 2.25 percent rate drops the monthly payment to $1,965. Today, the 2.50 percent rate gives you a $2,000 monthly payment, but youíre holding out for another $35; the difference between 2.50 percent and 2.25 percent.
By waiting three more months youíve already lost nearly $900; thatís the difference between what you have now and whatís available. Youíve lost $900 in interest payments trying to save another $105 over the past three months. By waiting, youíre losing money. And no one knows what rates will do next week, much less next month.
Oh, and what happens if the Unemployment Rate unexpectedly fell to 5.00 percent? Bye-bye low rates.
For some, itís very tempting to hold out for the absolute best rate. But in reality, how do consumers know when rates have hit bottom? They look in the rear view mirror.