POST TAGSFinancial Planning Refinance Debt Management
Blog posted On May 05, 2021
Last week the Federal Open Market Committee (FOMC) voted to leave the benchmark interest rate near zero. Consequently, the cost of borrowing will remain relatively favorable for consumers. If you’re thinking about how to take advantage of low rates, now is the time. Don’t know where to start? Here are two ways you can take advantage of interest rates while they’re still low.
Though the benchmark rate doesn’t directly set mortgage rates, it does affect them. When the FOMC raises rates, mortgage rates typically go up. When the Fed lowers rates, mortgage rates typically go down. Since the Fed lowered the benchmark interest rate at the beginning of the pandemic, mortgage rates have remained in a historically low range. Though they have been fluctuating slightly higher than they were one year ago, they are still very low. By comparison, in early 1980s, the average 30-year fixed-rate mortgage rate was over 15% -- roughly 5x higher than they were in 2020. Even in 2018 they were nearing 5% -- much higher than they have been over the past year.
A mortgage refinance is when you pay off your current loan and replace It with a new loan. With the new loan, you could choose different loan structures, terms, and rates. By refinancing when rates are low, you could save hundreds of dollars in your monthly mortgage payments and thousands over the life of your loan. For example, if you take out a 30-year mortgage loan for $350,000 at a fixed-rate of 5%*, your monthly payments would be $1,879 and your total cost over 30 years would be $676,395. If you refinanced after ten years, when your remaining mortgage balance was around $280,000 and interest rates had dropped to 3.5%*, your monthly payments would be $1,257 and your total cost would be $452,637, a savings of over $220,000.
Most credit cards have a variable rate – meaning that their interest rates fluctuate over time. The fluctuations largely depend on the Fed’s benchmark interest rate. If the Fed pushes the benchmark rate higher, the credit card rate interest rate will climb as well. If the Fed keeps rates near zero, like they are now, then your credit card rate will likely be lower than it was just a few years ago. So, if you wanted to increase your payments now while interest rates are low, it could help you pay down your debt quicker and save on future interest costs.
Another option would be taking out a personal loan or using a cash-out mortgage refinance to pay off your high interest debts like credit cards. Typically, the interest rates on personal loans and mortgage loans are much lower than credit card rates. So, if you opted for a cash-out refinance to help pay off your high interest debts, you not only could save money on your mortgage interest, but you could save on your other debt interest as well. For example, let’s say you have the following debts:
If you’re paying these all off over five years, then your total cost would be $17,191 + $8,118 + $8,116 = $33,435. That’s a lot more than the initial cost of $27,000. With a cash out refinance, you could pay off your $280,000 loan, increase your 30-year fixed-rate mortgage loan to $307,000, take the $27,000 in cash, and pay off your debts right away. Then, you’d still be lowering your mortgage interest rate and saving over $6,000 in high interest debt.
Low interest rates can make a big difference on high interest debt and your mortgage payments. But they don’t last forever. If you have any questions about refinancing or consolidating debt, let us know.
*Payment example: If you choose a $200,000, 30 year loan at a fixed rate of 5.0% (APR 5.165%), with an LTV of 95%, you would make 360 payments of $1,553.34 Payment stated does not include mortgage insurance, taxes and insurance, which will result in a higher payment.