If you’re a homeowner, pay attention any time the Federal Reserve changes its lending rates. Those changes could affect your ability to refinance.
Refinancing is a good thing for borrowers. The lender agrees to lower the interest rate on what’s left of your loan. That means you’ll spend less on your monthly mortgage payment and could take advantage of other opportunities, as well.
So what’s the connection to the Fed? That’s a little tricky, because the Fed doesn’t set mortgage rates. Rather, the Fed controls how much banks charge each other for loans, which has a larger effect on how much interest consumers pay when they borrow money.
In general, when the Fed lowers or raises its interest rates, mortgage rates tend to follow. The best environment for refinancing a home loan is when mortgage rates are low. If the Fed starts raising its rates, mortgage rates will likely move higher. If you’re interested in refinancing, it’s often best to move before rates start moving higher.
Borrowers often ask how much lower a rate would make refinancing a good option. Experts generally put the range between 1 and 2 percent, but the minimum depends on your loan.
As we mentioned, refinancing could offer several advantages, depending on how your mortgage is structured. It might eliminate the need to pay extra for mortgage insurance, for example, or keep you from having to pay a large balloon payment at the end of your loan.
Refinancing could help you switch from an adjustable-rate mortgage, or ARM, to a fixed-rate loan. While the interest on an ARM varies over the life of the loan, a fixed rate stays the same.
If you do refinance, keep a few things in mind. First, you’ll deal with closing costs again. You can roll those costs back into the new loan but doing so could result in higher interest. Also, it usually takes several months of payments before you break even on the new loan. In that case, refinancing might not be best if you plan on moving soon.
Time is a factor, as well. If you’re 10 years into a 30-year mortgage, for example, refinancing might not allow you to save much over the remaining 20 years, even with a lower rate. But if you can refinance a 20-year mortgage down to 15 years, the lower interest and shorter term could result in substantial savings.
If you’re interested in refinancing your mortgage, talk to a qualified lender. Set goals and make sure you have a clear understanding of how the process will change your loan rates, term and monthly payments. Origin has a variety of personal finance calculators online that show how the numbers play out over the term of your loan, and they’re free for anyone to use.
If you’d like to know more about refinancing, contact Origin. We will work with you to figure out the best options to suit your needs.