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Residential real estate is riddled with remorse. Remorse eventually rears its repulsive head in almost every purchase, sale, and refinancing.
Sometimes, borrowers get a mild case of remorse to which the balm of logic can be applied. Other times, however, no amount of reasoning with the infected party will suffice — masochism reigns supreme until the disease runs its course.
You may have suffered through a bout of buyer's remorse already. Remember that sickening feeling you got after the sellers accepted your offer? You were absolutely certain that you'd offered too much money for the house. To prove it, you continued visiting Sunday open houses and kept scrutinizing the classified ads searching for homes with lower asking prices that were bigger and better than the one you were buying.
Unbeknownst to you, the sellers were probably going through the exact same exercise in reverse. Shortly after they signed the contract, they convinced themselves that they were giving their house away. To prove it, they spent weekends touring open houses and devoured real estate ads looking for houses with higher asking prices that weren't as nice as the one they were selling.
Exhaustion wears most buyers and sellers down eventually. Buyers see enough comps to reinforce the validity of their purchase price. Ditto sellers for the sale price. Logic prevails. Life returns to normal.
Borrower's remorse is equally devastating. This dreadful scourge appears in two incarnations whenever mortgage rates are in a state of flux.
Phase I borrower's remorse
Suppose that you bought a home when interest rates were on the high end of a periodic cycle. The best loan you could get at the time was a 30-year, fixed-rate mortgage at 8.5-percent interest. Now interest rates are falling, and you're agonizing. To lock (your new loan's interest rate) or not to lock?
For instance, people who replaced 8.5-percent loans with new ones when rates hit 7.5 percent kicked themselves as rates continued to fall. In a declining interest rate market, the situation wasn't much better for people who waited until rates hit 7.25 percent, 7 percent, or 6.75 percent to refinance.
Phase I borrower's remorse strikes whenever interest rates fall. Here's what it sounds like: "Darn it! Interest rates just dropped another 1/4 point. I knew I should have waited a little longer to refinance my loan. Look how much more money I could have saved if only I had waited. Everyone said rates would go lower. Why didn't I listen? Why was I so impetuous? What a fool I am!"
 | Don't beat yourself up. Instead of dwelling on how much money you could have saved if you had waited to refinance, focus on how much money you are saving each month because you refinanced. Sure, as it turns out you could have done a little better. On the other hand, rates may have gone up instead of down. Your new loan payment is an improvement on the old one, isn't it? You're better off financially than you were, aren't you? You know the magic formula to determine a refi's break-even point. If rates keep falling, you can refinance again. For the time being, however, savor your savings. |
Phase II borrower's remorse
When mortgage rates are concerned, what goes down inevitably goes back up. It's the nature of the beast.
Sooner or later, every cycle of interest-rate reductions hits rock bottom and starts north. When that happens, you enter Phase II of borrower's remorse. Phase II makes Phase I look like a walk in the park.
"Why did I wait so long to refinance? What a fool I am! Look how much money I could have saved by refinancing last month. Everyone said rates were going to start rising. Why didn't I listen? Why was I so greedy?"
Phase II is faaaaaaaaaaaaaaar worse than Phase I. All the folks who refinanced their loans while interest rates were falling are saving money. True, some of them are saving more than others because they got lower interest rates, but everyone who refinanced came out ahead to greater or lesser degrees. Some people who delayed refinancing because they wanted to get the absolute lowest possible interest rate ended up with nothing.
 | The only way to be sure that rates have hit bottom is to watch them start going back up again. Whenever that happens, the crush of people who waited to refinance added to the normal demand for new home purchase loans stresses the mortgage delivery system beyond its breaking point. Remember the old law of supply and demand? The demand for mortgages far exceeds the number of people valiantly trying to process them. Lenders will be buried under an avalanche of loan applications. Appraisers will have a two-month backlog of appraisal orders. Title companies can't churn out title reports as fast as new requests arrive. It's the fiscal equivalent of a nervous breakdown. |
| Suppose that you have a $200,000 loan at 8.5-percent interest with a monthly payment of $1,538. Suppose that you could refinance it today at 6.5 percent. Doing so would drop your payment to $1,264 — your payment will be lowered $274 per month. If you wait a little longer until rates drop to 6.375 percent, however, your payment would drop another $16 a month. But each month you have to wait, your loan payment is $1,538. You're spending an extra $274 a month in the hopes of maybe reducing your loan payment another $16 per month. Not smart. Rates go up every bit as easily as down. Don't be greedy — grab the big bucks while you can. |
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