Buy, Refi, or Wait? Tips for Making a Decision

Smart Solutions • March 2015

Mortgage rates are the lowest they’ve been in more than a year and a half. And that’s causing many people to jump off the fence and into a mortgage purchase or refinance. But is it the right move for you?

In this issue of Smart Solutions, we’ll help you decide by exploring the common issues homeowners face when making this important financial decision. We’ll also break down considerations for home equity borrowing, so you can determine if now is the right time to take advantage of a home equity line of credit.

And remember, if you have any questions, Commerce Bank is always standing by to help you with your banking needs.

Rate Update: Should I buy, refi, or wait?

At press time, the average rate on a 30-year fixed-rate mortgage was the lowest it has been since May 2013.1 Economists expect mortgage rates to rise gradually by the end of 2015 — perhaps reaching around 5%.2

That means, if you’re thinking of buying a home or refinancing your mortgage, now may be the perfect time to take advantage of this recent round of low rates. Below, we help you assess the situation to see if it fits your goals.

New Homebuyers: Low rate or down payment?
It’s a common dilemma for people qualifying for their first mortgage loan. Without at least a 20% down payment, you’ll have to pay for private mortgage insurance (PMI), which can cost between 0.5% to 1% of your entire loan amount on an annual basis. For a house costing $230,000, a 1% PMI fee would add up to $200 a month — as much as some car payments. So there’s a real incentive to wait until you’ve saved enough of a down payment to avoid PMI altogether.

On the other hand, acting now, while rates are lower, can mean spending less on your home overall — which also can lead to a lower monthly payment. For example, compare that same $230,000 house with a 30-year fixed-rate loan at either 3.875% (roughly where rates are now) or 4.875% (where rates could be headed later this year). The lower rate would save you $135.63 each month.

To help determine which option to take, figure out how long you would have to pay on your mortgage until you reach 20% equity. Knowing the number of months you’d have to pay the extra PMI will help you evaluate whether going with a lower rate — and paying PMI for a few months or years — is worth it.

Homeowners: Is a refi worth it?

While many people refinance solely to lower their monthly payment, the current rule of thumb suggests considering a refi when the current rate drops one to two percentage points below your existing mortgage rate.

But to determine if refinancing really makes sense for your situation, you have to calculate the break-even point, comparing your long-term savings to the upfront costs of a refinance. Ultimately, your savings should be greater than your refinancing costs.

Here’s how to do the calculation:
1. Determine your total refinancing costs include fees for closing, origination, and appraisals.
2. Figure out how much you will save each month with the new, lower rate.
3. Divide the total cost by the monthly savings to get the number of months until you reach the break-even point.
4. Determine how long you plan to stay in your current home. If this is longer than the months it takes to break even, you might want to consider refinancing.
Refinancing Costs: $2,000
Monthly Savings: $50
$2,000 / $50 = 40 Months Until You Break Even

Take Advantage of Shorter Terms, Too

Lastly, the mortgage term length can matter as much as the rate. For example, refinancing from a 30-year to a 15-year mortgage could potentially save you thousands over the course of your loan. Plus, it can be a great option if you’re looking to be finished with mortgage payments in time for retirement.

As you can see, there are many variables to consider. But ultimately, the decision comes down to crunching the numbers and seeing how they fit with your goals.

Interested in learning more?

Interested in learning more?

  1. "It’s Time to Think About Refinancing Your Mortgage," by Neil Irwin,, posted Jan. 20, 2015,, accessed Feb. 6, 2015
  2. “Should You Refinance Your Home Loan in 2015?” by Brandon Cornett, U.S. Housing News, posted Nov. 7, 2014,, accessed Feb. 6, 2015
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