Dear 2009, can I have my money back?

Low rates are here, and have been here for a solid month now. People can obtain rates anywhere from 4.5% to 5.125% when just a short time ago we were closing loans at 6.125%+. By all accounts, these are excellent interest rates and they should actually be stimulating the real estate market NOW. 

A very strange thing has happened though, and I am not sure it’s entirely healthy. People seem to be fixated on ‘waiting’ for ultra-low rates that may never appear, and in the meantime they continue to pay their 6.5% or 7% loan payment. Might 4.5% with NO points happen? Maybe. Maybe not. Tchaka Owen, who commented on another blog and writes on Active Rain brought up a very good point. He mentioned that no matter what the government does, it’s the LENDERS who control where rates go. So, while all signs are pointing to 4.25% RIGHT NOW, we are not seeing those rates on the street. Lenders don’t want to do it. Why? Because they are trying to make money, and because they are so understaffed they know they’ll get killed if they open the floodgates. If those rates aren’t there NOW, when they should be, how do we know they will be at some point this spring (or next week)? 

Let’s take a look at what ‘waiting’ for the magical rate does in two examples. One, a loan amount of $150,000 and the second a much larger loan amount of $450,000- both paying 6.5% currently.

 

At $150,000, the payment is: $948

At $450,000, the payment is: $2844

They can both obtain 5% with no points currently- and those payments are:

On the $150,000 loan: $805 (savings- $143)

On the $450,000 loan: $2415 (savings- $429)

Let’s say they are holding out for 4.5%, what would their payments be?

The $150,000 loan would carry a payment of: $760. This would mean an additional savings of $45/month.

The $450,000 loan would carry a payment of: $2280, or an additional savings of $135.

 

Based on these numbers, one could argue strongly for holding out for the lowest rate on the higher mortgage amounts, but not so much on the smaller mortgages. The difference in payment, in my opinion, is not ‘earth-shattering’ enough on the $150k loan to get worked up over. And honestly, even on the $450k loan, is missing out on 4.5% reason to cry? I doubt it. Both scenarios are saving so much at 5% that holding out for a little extra may end up costing them. And how do we know where rates will bottom out? We don’t!

What happens if someone closes at 4.875%, and rates continue to fall? Are they going to beat themselves up for ‘not holding out’ long enough?

My suggestion would be to not get all wrapped up in the rate, it will drive you crazy. While I understand the want behind getting the best rate, I can’t get behind the current obsession. If you want to close, and it will save you money, the sooner you do it, the better. End of story. Rates may continue to fall, and if they do, remind yourself that you had 6.5%+/-, and you were one of the lucky ones that could refinance and get out of it. People can beat themselves up over many things, getting the lowest interest rate should not be one of those things!

 

2009, here we come! Hold on to your hats!

 

Jennifer Monastero

Citizens Community Bank

 

 

January 2, 2009