Refinancing a home can have some pretty nice benefits for homeowners, especially when it comes to lowering their monthly payments. Depending on how much of a rate drop they can get, it’s not unreasonable for them to cut their home payment by several hundred dollars a month. That’s big. 

If your prospects have been putting off buying a new home and considering a refinance instead, their window of opportunity seems to be closing quickly. That means it’s time for you to nudge them about exploring all their options – like buying a home from you. 

So, why is refinancing not necessarily the best choice right now? 

The recent rise in interest rates to an average of more than 4 percent has caused refinancing to lose some of its luster for homeowners. According to a recent MBA survey, refinance applications are down 3 percent and stand 49 percent lower than last year when the 30-year fixed-rate mortgage was 2.77 percent, and the 15-year rate averaged 2.21 percent. 

Refinancing makes the most sense when homeowners can get a significant drop in interest rates, which translates into big savings on their monthly home payments. But since the rates have started creeping up, homeowners have less incentive to refinance. 

Besides the less potential to lock in a significantly lower rate with a refinance, there are other practical reasons why your prospects should reconsider refinancing. 

It Could Take Too Long to Break Even 

Those refinancing to a lower monthly payment might assume they’ll immediately start saving money. But that may not be the case. To calculate savings, they need to factor in how much they spent (closing costs and fees) securing the loan and consider how long they plan to stay in the home.  

For example, let’s say they spent $8,000 on closing costs. Once they break even on that amount, they’ll have fully recouped the loan costs. Then, they’ll begin saving money. 

It takes time to reach that point. In this example, if the refinance saved your client $100 a month in mortgage payment, that means it will take them 80 months (over six years) to make up that $8,000 they spent at closing.  

They Already Have a Low Fixed-Term Rate 

Even though interest rates are the highest they’ve been since May 2019, they’re still historically low. That means your clients’ current rate may still be pretty low, so refinancing might not provide massive savings. 

But every situation is different, so in some cases, every dollar makes a difference. Just make sure your clients know that buying a new home might be the best option instead of refinancing their current one. 

They Can’t Afford Closing Costs 

Saving hundreds a month on a mortgage loan sounds fantastic. But if your clients haven’t accumulated money for loan closing costs, that could be a problem when it comes to refinancing. 

Closing costs can account for 3 to 6 percent of the loan amount. Those who don’t have cash for the fees might have to roll those costs into the loan amount or settle for a higher interest rate. That means the savings they thought they were getting from refinancing dwindles. When that happens, it doesn’t seem worth the hassle anymore.  

Payment is Actually Higher 

Some homeowners refinance into a shorter-term loan so they can pay off their mortgage faster. That strategy reduces the amount of interest they pay over the life of the loan. 

It can pay off down the road, but there is some risk in the short term. That’s because they are locking themselves into a higher monthly payment, which might limit their financial flexibility. That’s especially a problem if financial difficulty – like loss of income, a significant home repair, or an emergency – pops up.  

If your client wants to pay off their loan faster with less risk, suggest that they just add additional payments to their mortgage when their budget allows. They can do it as often as they like without committing to doing it regularly. And the result is the same – paying off their loan sooner and saving on interest payments.

Encouraging a client or homebuying prospect to refinance doesn’t do you any good in the short term as a real estate agent. But one thing that does benefit you long term is making sure they understand and consider the advantages and pitfalls of all their options. 

If they view you as an industry expert and advocate for them (even when it doesn’t help you), they’ll be more likely to seek you out when they’re ready to buy a home or recommend you to someone who is ready.

RESOURCES 

Yahoo! (n.d.). Mortgage rates: Homeowners face a shrinking window to refinance. Yahoo! Retrieved February 22, 2022, from https://money.yahoo.com/mortgage-rates-homeowners-face-a-shrinking-window-to-refinance-213826658.html  

Mortgage applications increase in latest MBA weekly survey: Mortgage Bankers Association. MBA. (n.d.). Retrieved February 22, 2022, from https://www.mba.org/2022-press-releases/january/mortgage-applications-increase-in-latest-mba-weekly-survey-x288554