As mortgage rates remain higher than they have been for more than a decade, more and more homebuyers are purchasing a home with the plan to refinance the mortgage loan as soon as mortgage rates drop to a more favorable level. Is this a good idea for purchasing a Sunset Beach home? Is this a solid strategy for getting into a home as market values continue to increase?
Should Potential Buyers Purchase a Home with Plans to Refinance the Mortgage Later?
Purchasing a home with a mortgage rate higher than ideal for the homebuyer to get into the home with plans to refinance and secure a lower mortgage interest rate later is often referred to as “dating the rate.” A new study shows that this strategy is often risky.
This study dug into the attributes of taking out a mortgage loan and then trying to refinance the loan later. In many scenarios, a homebuyer would need the interest rate to drop 75 basis points before seeing a savings worth refinancing for. If interest did drop this much, it would take an additional three years to break even after factoring in the out-of-pocket costs to close the loan.
Dating the Rate Can be Helpful, but it isn’t a Solid Strategy
If you’re planning to refinance sometime in the future to continue to afford mortgage payments is not a solid and strong strategy for purchasing a home. It might prove to be beneficial and helpful, but there is no crystal ball guarantee that the plan will work out.
This is not a strategy that a Sunset Beach homebuyer should take if they are desperately dependent on being able to get a lower rate in a few years. For example, a buyer should not go into a purchase planning to utilize a long-built emergency savings account to pay the extra money beyond what is comfortably affordable for the next few years until the mortgage rate comes down to a level that would make monthly payments affordable again. Using the “date the rate” strategy as something you need to depend on is an unsafe strategy.
The date the rate strategy should only be considered if the homeowner can make the current mortgage payment comfortably and would like to explore making it even more comfortable in the future.
It is also best to consider how long you plan to stay in the home before trading your current loan in for a new one. Refinancing is hitting the reset button on your mortgage’s break-even point. You are starting back at zero on the break-even point timeline. A break-even point is the point where, if you sold the home, you have gained enough equity in that home to sell it at a profit after considering how much money you have paid into it.
Don’t Forget About the Costs of Taking Out a Loan
A loan is never just about being handed money. There is a cost to the homeowner/buyer associated with every loan. These costs are most significant when it comes to a down payment and closing costs. These costs can vary widely depending on your location.
The property taxes play a huge role in determining closing costs for a home. Recording fees and transfer taxes can also make a big impact on how much someone will pay to close on the refinance of their home. Some locations in the United States can take as much as five years to hit the break-even point on refinancing their home loan.
Don’t enter into a home purchase that will stretch your budget thin, thinking you can get some relief by refinancing in a few years. Make sure the math makes sense. It is never a good strategy to purchase a home where the payments are uncomfortably expensive.
If you are considering purchasing a home in Sunset Beach, please contact us. We are here to help you with any Sunset Beach real estate needs, both buying and selling properties.
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