Hold Off or Jump In?
Does it make sense to refinance or buy now or will you be better off waiting. The answer is it depends whether or not you are refinancing or buying a home.
If you are refinancing a home, you may be better off jumping in now. Sure there is a possibility rates will go lower if you wait. After all, the economy seems to be getting worse and the Federal Reserve is recognizing this fact and responding with rate cuts.
But while you wait for rates to go lower, home values are declining dramatically. In northern Fairfield County in Connecticut, we are seeing 10% to 15% declines in value. Value declines of this magnitude can eliminate any potential savings to be gained by waiting for lower rates.
How so? In addition to credit grade and the type of income and asset documentation available, loan to value can have a significant impact on the rate you get on your mortgage. Loan to value is the ratio of your loan amount to the appraised value of your home. The closer you get to 100% loan to value, the worse your financing terms will be.
So while waiting for lower rates, if your home’s value is declining precipitously, you can easily negate the effects of lower rates by increasing your loan to value ratio. Based on this premise and the fact that currently rates are within a point of their all time lows (conventional 30, 20 and 15 year fixed rates), now is the time to refinance. This is especially true in light of what is happening to home values.
If on the other hand, you are a home buyer, by all means take your time. As stated previously, home values are declining so the longer one waits the better deal to be had. Furthermore, there is no bottom in real estate prices anywhere on the horizon.
Foreclosures are expected to at least continue on their current record pace and some say they may accelerate. I believe they will accelerate before the market gets any sound footing. I say this because there are trillions of dollars in adjustable rate mortgages out there getting ready to adjust upwards. This will make homes more unaffordable for people already struggling with their payments.
Many of these people bought their homes with very little or no down payments. These people won’t be able to refinance because the amounts they owe will be greater than value of the home due to severe price declines. They will need to tough it out or be foreclosed upon which will put even more downward pressure on home values.
It was also stated earlier that rates are declining. As the economy slows, which it will due the strain the housing market is putting on it, rates should continue to decline. This means not only will buyers get better prices by waiting but they should also have very good rates available to them when they seek purchase financing.
So if you are a homeowner and are considering refinancing, do it now. If you are considering buying a home, there is no sense of urgency to jump in from a price and interest rate perspective. For the time being, the longer you wait the better it gets.
If you are a homeowner looking to trade up or down, the current environment applies to you on both the sell side and the buy side. Meaning that while you will get less for your current home, you can expect to pay less for your next home. For people in this situation, there really is no need to rush or to wait.