If you have significant debt, such as a mortgage or a high credit card balance, you should consider whether right now is a good time for you to refinance — before rates get any higher.
The Cost of Borrowing
Interest is the money you pay in order to borrow from a creditor, such as your credit card company or mortgage company. If you first acquired your debt years ago, when rates were higher, then you may have been considering refinancing for a while now. But when interest rates rise, refinancing becomes more expensive. For instance, on a $200,000 mortgage a rate increase of just 1% can cause a borrower to have to pay over $100 more per month in interest on that loan.
When interest rates are expected to fall, many borrowers choose to wait and watch the financial markets in order to refinance at just the right time to save the most money on interest rates. When rate increases are anticipated, which they are as of the beginning of 2017, it is a good time for borrowers who are interested in refinancing their debt to start shopping around.
There is an Upside
Don’t let this article give you the impression that rising interest rates is entirely a bad thing, it’s not. In fact, rising rates are a sign that the economy is healthy. It also means that you might see an increase in the amount of interest your bank or credit union pays you on your savings account, or the rates offered on CDs.
And when interest rates are rising, that usually means the financial markets are doing well. In fact, at the time this article was written, the Dow Jones Industrial Average was nearing an historic mark of 20,000 – a sign of a growing and healthy Wall Street.
To put it in perspective, although no one wants to pay more than they have to on car payments and mortgages, the anticipation of rising interest rates is actually a great sign for the country.
Now is the time to lock in a rate as soon as possible if you’re going to refinance any debt. Ditto if you are in the market for a big purchase, such as a car or mortgage. And, if your current mortgage is an ARM (adjustable rate mortgage) then you definitely want to look into refinancing to a fixed-rate mortgage before rates rise any further.
Your mortgage payment can rise dramatically with an ARM in the months and years ahead, but with a fixed-rate mortgage your monthly payment and interest rate are guaranteed for the life of your loan. Most borrowers currently in an ARM will benefit from refinancing to a fixed-rate, but some of the considerations are prepayment penalties and how long you plan to stay in your home.
A prepayment penalty can make refinancing, even to a fixed interest rate, economically unfeasible if you plan to sell your home in the next few years. Start by pulling out your mortgage and loan documents and reviewing the terms. Find out how much your rate can go up, what penalties apply to prepayment, and whether there is a cap on how much the rate can rise over the life of the loan regardless of market conditions.
How Much Does Refinancing Cost?
Refinancing existing credit card debt to a card with a lower rate is usually a smart and inexpensive move, especially if you don’t close the old card’s account (closing existing accounts can have a negative effect on your credit score by decreasing your average credit history length). Ditto with car loans, personal loans, and even student loans which usually don’t have a lot of closing costs involved.
However, mortgages are a different story. Closing costs on an average refinance will be several thousand dollars, and can include the cost of an appraisal, a new survey, loan origination fees, title insurance, and escrow fees.
To determine whether it makes sense for you, you can calculate how much longer you’ll need to stay in your house in order to make the refinance costs worthwhile, and at what point you’ll break even between what you’ve saved in interest versus what you’ve spent in refinancing costs.
Most people who plan to stay in their current home for at least a couple years more will find that it makes sense to refinance. However, remember that refinancing costs need to be paid upfront when you close on the new loan, and are recouped over time.
Don’t be afraid to ask your loan officer for discounts off the lender’s origination fees, or for a lender credit to offset the closing costs.