How to Take Advantage of Lower Mortgage and Other Interest Rates
Should You Refinance When Rates Are Low?
If mortgage interest rates are low, should you take advantage of the lower rates to refinance your mortgage? Should you take out a home equity loan? Should you buy a new car? Or perhaps transfer your savings into a CD? Or search for a new credit card deal?
Ultimately, what should the lower interest rates mean to you? In this article, we'll discuss mortgage moves you should consider during periods of low mortgage interest rates.
Lower Interest Rates and Fixed Rate Mortgages
A reduction in interest rates by the Federal Reserve doesn't necessarily result in drastically lower rates for fixed-rate mortgages. This is because bond rates, not the Fed rate, drive fixed mortgage rates.
You've probably heard that it only makes sense to refinance your mortgage if the new interest rate is at least two percentage points lower than your current rate. Forget this piece of advice. It may have worked in the days when you could only get a 30-year fixed rate mortgage, but it doesn't apply in today's financial markets where there are many options for financing your home, including fixed mortgages with terms of 15, 20, or 30 years, five- and seven-year balloon loans, and a wide variety of Adjustable Rate Mortgages (ARMs).
Even if you can't necessarily lower your monthly payment by refinancing, it might still make sense to refinance if you can swap the insecurity of an ARM for the stability of a fixed rate. Marshall Loeb of CBSMarketWatch.com offers guidelines for helping you decide whether to refinance, in his book 52 Weeks to Financial Fitness.
Lower Interest Rates and Adjustable Rate Mortgages (ARMs)
Unliked fixed rate mortgages, adjustable mortgage rates are affected more by changes in the Fed rate because these types of loans follow short-term interest rates, such as Treasury bill (T-bill) rates, which do follow the Fed rate.
But when does an ARM make sense? If you're planning to stay in a home for only a few years and you can get an ARM for significantly less than a fixed rate mortgage, you may come out ahead by going for the ARM. Adjustable rate mortgages are also popular with people who may have difficulty qualifying for a loan at higher fixed interest rates. The lower ARM rate lowers their monthly payment, making it easier for them to qualify for the loan in the first place.
If, on the other hand, you already have an ARM and you plan to stay in your house for the long-term, consider locking in at today's attractive fixed mortgage rates.
Lower Interest Rates and Home Equity Loans
Home equity loan rates follow the prime rate, so they are directly affected by the Fed's interest rate increases and decreases, although they are always higher than regular mortgage rates.
When interest rates are low, it's an excellent time to take out a home equity loan (but not necessarily a home equity line of credit, which works differently). But you should be very careful when considering a home equity loan and only take one out if it makes sense financially.
Making the Decision to Refinance
If you decide to refinance, first contact your current lender to see if you can negotiate with them to waive some of the closing costs. If this doesn't work, you can call local lenders for rate information. Today, the best way to search for and compare mortgages is to do so online at one of the many websites that offer this service, such as quickenloans.com, or bankrate.com, to name just a few. Many online brokerages will also allow you to apply for the loan online.
If rates are low and you're in the market for a lower mortgage rate, don't hesitate to investigate whether you can save money by refinancing.