Part of my thing when I discuss mortgage rates is to focus on the monthly payment as part of the overall financial picture and not the interest rate number. A mortgage rate is a number we see in percentages on billboards and local newspapers ads, but when an individual looks at, it should be in dollars and cents. The monthly outlay they will pay for principal and interest along with their insurance, taxes and any other housing expense. Then take that number and add into the mix of car payments, tuition and miscellaneous credit cards. What can you afford overall and how can you reduce the big picture? There might be ways to reduce the monthly payment as well as your overall monthly nut. That is the focus.
In the case of a refinance, the interest rate is not about getting a lower rate than your cousin but saving a good amount from your previous mortgage payment. And so there is greed. Last week, I locked in two people in different scenarios. Think about which client is smarter.
Client number one: Mike and Molly are refinancing their current 30 year fixed mortgage at a rate of 5.75%. They have a second mortgage which will be subordinated and credit that is slightly below 720. When we started, he had 3.875% in his head as the new rate. This rate would save him over 425 dollars a month! The process took so long, that when he was finally ready to close, the rate was up to 4.125%. I suggested he wait it out for them to drop a bit but he decided to lock it in at the higher rate which would save him almost 400 dollars a month. He was happy and satisfied with that and is closing his loan this week.
Client number two: Jack and Jill are refinancing a loan where the principal has been paid down to almost half. The new monthly payment will go down by more than half, a savings of 1,200 a month. The client has complicated income, a low credit score and other issues which have dragged the process out way too long. He also had in his head 3.875%. When we were finally ready to lock, the rate was 4% and he refused to take it. The monthly payment would be a difference of 18 dollars. After wasting much time, we finally locked him in at 3.99% and of course he is quite unhappy. The irony is that his overall housing expense is high because he can grieve his real estate taxes (based on a lower home value) and he can renegotiate his homeowners insurance to lower those payments. Neither of which he chose to because he was spending so much energy in the 18 dollars a month.
The bottom line is the principal and interest payment is truly only a part of your overall housing expense and part of your bigger financial picture. Most people get blinded by the interest rate number and not the monthly payment. Look at your interest rate reduction as dollars of savings and you will win every time.