You’ve done everything right. You kept investing, even in a depressed market. You just purchased your rental property at a whopping 8.5%, but you did your math, and the numbers worked. You last month, and then the news came out – interest rates went down! Are you a failure as an investor?
Don’t beat yourself up. Only a fool tries to time the market. It’s easy to think that refinancing is the thing to do right now, but there are a few reasons you should wait.
- Closing costs. These can cost you a bunch, around 1% of the amount financed. While a few grand might not seem like much to someone with deep pockets like you, that cost wipes out much of what you gain with the refi. And, since you are quick to refi, you’ll probably want to do it multiple times to squeeze every last dime out. It’s not worth it. Now, the closing costs multiply and your profit goes way down.
- Prepayment penalty. These clauses have been creeping into mortgages now. They won’t be in FHA loans, but we are talking investments, so you’ll likely have a conventional loan anyway. Banks know that rates can’t stay high forever and they don’t want to lose a bunch of money when their borrowers leave for the refi, so they have been demanding that you pay them a chunk of the interest they would have received, should you have stayed with the loan. Check your loan docs to see.
- Seasoning. This is the one of the list most likely to stop you. Most lenders will require you to have paid 6 to 12 months on your mortgage before offering a new one. This is often to decrease the lender’s perceived risk. They believe that proving a payment history means it is more likely you will continue to do so. Try to refinance before this, and you’ll likely run into a lot of ‘no’ answers.
- You aren’t saving much. We often fantasize about what it would be like 20 years from now when the loan is paid off. We will have made so much money! But the time value of money means we don’t really know what it will be worth. Look to what the refi saves you today. On a $100,000 loan at 8.5% and 20% down, you’ll pay $86,622 in interest over 20 years. Change the rate to today’s rate of 7.2% and you’ll pay $71,171. Does a 15k difference over 20 years move the needle for you? Subtract an extra 1k for closing costs and it’s even less interesting. But, what about today’s savings? The monthly payment goes form $694 to $630, for a $64 savings. With the closing cost of $1,000, it takes you about a year and a half to even break even. Rates could be a lot lower by then!
It’s good that you are looking at the rates and thinking of refinancing. There will be a time when it is the right thing to do for you. If you are going to go to the work and expense, make sure it makes a big difference. It doesn’t right now.