Buy Now, Refinance Later
Soaring home prices and rising interest rates as compared to recent years may leave many aspiring homeowners feeling stuck.
But there is a potential solution being offered by many lenders: a “buy now, refinance later” option, where you lock in an interest rate today and refinance later if they fall. This strategy is gaining in popularity, as noted in a recent US News survey that revealed 84 percent of recent buyers plan to refinance in the future.
However, while this approach may potentially save you money in the long run, not all “buy now, refinance later” programs are the same. Therefore, it’s essential to research the facts, including the downsides and benefits. Follow this guide to help ensure you are making the right financial decision for you.
Weigh the risks vs. reward
As a general rule of thumb, interest rates should be at least 0.75 percent to 1 percent lower than your original rate for refinancing to make financial sense. However, there is no way to predict with certainty when that may happen, so taking the “buy now, refinance later” option can be a bit of a gamble. The reward is a possible opportunity to lower your monthly payments down the line, while the risk is that rates never fall enough to refinance, at least not within the needed time frame. For instance, if you plan to stay in the house for only a few years, refinancing would likely not become a feasible option before you’re ready to move again.
Additionally, lenders typically set a deadline for refinancing your mortgage, which you may not meet if rates don’t drop. This would mean losing the program’s closing costs perks, such as not having to pay them at all. Consequently, what initially seemed like a potentially cost-effective option may end up not saving you anything in the long run.
Be comfortable with your current payment
Since there are no guarantees regarding when or if rates will drop within your specific time frames, it’s crucial not to bank on this possibility by accepting a mortgage payment that wouldn’t be sustainable. You should only go with the “buy now, refinance later” option if it matches what you can afford at the time of purchase to avoid setting yourself up for potential future financial difficulty.
Understand the terms of the program
Any mortgage agreement will have numerous small details, so carefully read the fine print to ensure you know all the stipulations and fees along with what expenses are integrated into the loan. For instance, title, deed, and appraisal fees can add to the costs of closing on your refinanced loan, and you may be required to wait six months or make a minimum number of payments at a higher rate before refinancing. You’d also have to refinance with your original lender. These constraints could restrict your options for accessing more favorable rates from other sources.
Consider other options
Go with the lowest current mortgage rate
After careful consideration, you may decide that these programs aren’t worth the potential upsides. Instead, it may be a better choice to obtain a mortgage with the prevailing interest rate, which may come with fewer expenses and no strings attached.
Ask about a float-down option
If your mortgage rate is locked and interest rates drop before you close, a float-down option will enable you to take advantage of a lower one. Just note that your lender must approve the change and will likely charge a fee (usually a percentage of your loan amount.) When getting your rate, ask if this is an option you can sign on for, and be sure you understand all the conditions.
The decision to purchase now at higher interest rates and refinance later can be confounding. Work with an experienced mortgage broker, who can help you understand the ins and outs of this option and select the best deal for you.