With interest rates climbing every day, waiting to refinance could cost you in more ways than you think. What will happen if you wait to refinance in 2014? Let’s consider what we know. Interest rates have risen in the past few weeks, but they are still pretty low compared with just a few years ago.
It’s time to consider the present opportunity to refinance your mortgage. If you’re still questioning whether or not to make this move, here is what could happen if you decide to wait:
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YOU’LL FACE HIGHER STANDARDS TO QUALIFY FOR A LOAN.
The debt-to-income ratio is the amount of your total debt as a percentage of your total gross monthly income. What does your debt include? For starters, credit card bills, car loan payments, and the payment on the mortgage you want to get. This number usually cannot be higher than 40 percent but the higher your mortgage interest rate, the higher your monthly payment thus the more difficult it might be to qualify for the lowest rates that are available. And if the interest rate on your mortgage goes up, the payment will rise as well which could potentially take you out of the qualification range.
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YOU MIGHT HAVE TO PAY HIGHER FEES AND COSTS TO GET A LOWER RATE.
Essentially, there are two ways to get the lowest interest rate available.
1) Be the ideal applicant in all ways—sterling credit, very low debt-to-income ratio, a fat savings account for rainy days, etc.
2) “Buy” your rate down through paying “points”
Points are a one-time charge paid to the lender to reduce the interest rate you pay over the life of your loan, according to “A Consumer Guide to Mortgage Settlement Costs” by the Federal Reserve Board (FRB). Can a rising interest rate increase costs? The answer is yes, and here’s why:
If a borrower wanted to take out a $300,000 mortgage on June 27, 2013, they’d get a 4.46 percent interest rate on a 30-year fixed-rate mortgage with NO discount points. If the rates go UP to 6.32 percent and that borrower wants a lower interest rate, they will have to pay a discount point to drop it down to a possible 5 percent or two points to get it to a 4 percent.
YOU’LL PAY MORE FOR YOUR MORTGAGE OVER THE LIFE OF THE LOAN.
Let’s look at the lifetime interest cost when financing your home. Why? Most people tend to pay more attention to the monthly payment because that’s how we all budget our incomes. However, when we look at the overall cost, one factor sticks out, seemingly small changes in the interest rate can have major affects on the lifetime cost of your home.
If you wait to refinance and mortgage rates go back up to 6.32 percent, you’ll face paying thousands more over the life of your loan than if you refinanced now at 4.46 percent.
