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Fed declare half a percentThe rate cut came at the end of Wednesday’s two-day meeting by 50 basis points. Of course, some Americans will want most central bank’s first interest rate cut since the early days of the Covid pandemic.
“How quickly the impact of lower interest rates is felt depends on whether the household’s financing rate is variable or fixed,” said Stephen Foerster, a finance professor at Ivey Business School in London, Ontario, Canada. Some adjustments Relatively fast, some don’t reset at all.
That is, unless you can refinance.
According to a recent report Nerd Wallet18% of consumers said they plan to refinance their loans once interest rates drop. The financial services website surveyed more than 2,000 U.S. adults in July.
Experts say that while taking advantage of lower interest rates may make financial sense, there are often other factors to consider depending on the type of loan.
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There are no “universal rules” for mortgage refinancing
First, while mortgage rates are partly affected by Fed policy, they are also tied to Treasury yields and the economy. As a result, home loan rates are likely to continue to fluctuate.
Additionally, most homeowners are still getting lower interest rates than they might get if they refinanced now, with the exception of those who bought a home in the past two or three years, said Jacob Channel, senior economic analyst at LendingTree.
About 82% of homeowners Lock in an interest rate below 5%A 2023 Redfin analysis found that 62% had rates below 4%.
“There’s no universal rule for when people should consider refinancing their mortgage,” Channel said. “Some people will tell you that you shouldn’t consider refinancing unless you can get an interest rate that’s at least 50 basis points lower than you currently have, and others will say you should wait until you can get an interest rate that’s 100 basis points or more lower.”
Other factors to consider is your creditworthiness, which will ultimately determine what interest rate you can get, as well as closing costs, which typically range from 2% to 6% of your loan amount for refinancing, According to LendingTree.
“There’s no one-size-fits-all answer to the question of whether someone should refinance their mortgage,” Channel said.
Don’t wait to reassess your credit card debt
when it comes to credit card debtthe math is simpler.
Since most credit cards have variable interest rates, there is a direct link to the Fed’s benchmark. After the interest rate hike cycle ends, the average interest rate of credit cards has increased from 16.34% in March 2022 to more than 20% currently, close to record high. These annual rates will now decrease slightly, but not significant.
No matter what the Fed does, refinancing high-interest credit card debt is a good movesaid Matt Schulz, chief credit analyst at LendingTree.
“Assuming you have good enough credit to get a 0% balance transfer card, then it may be your best option,” he said. “Low-interest personal loans can also be a great tool.”
Alternatively, borrowers can call the card issuer and request a lower interest rate on their current card. A LendingTree survey found the average decline was about 6 percentage points. “That’s like going from 25% to 19%, and it’s more impactful than anything the Fed is going to do,” Schultz said.
Car loan refinance options depend on equity
Although car loan Is fixed, new car loan rates will fall in response to the Fed’s actions.
But for those with existing car loan debt, refinancing isn’t a given.
Ivan Drury, director at Edmunds, said: “Interest on a car loan is weighted more heavily at the beginning of the loan; so if you’ve been on the loan for a year or two, you’re already paying quite a bit more interest.” monthly payments, but may result in paying more interest over the life of the loan. “
Additionally, “if most of what you’re paying is interest, you may not have enough equity — or any equity — to really take advantage of lower interest rates,” he said, unless you put more cash into refinancing and get Smaller loans.
Consumers may benefit more from improved credit scoresHe said this could pave the way for significantly improved lending conditions.
Student debt refinancing can come with risks
Ultimately, as interest rates fall, student loan borrowers with adjustable-rate private loans may have reason to consider refinancing.
Higher education expert Mark Kantrowitz said: “Borrowers may choose to refinance their loans to take advantage of lower prevailing interest rates or an improvement in their credit score, which may also result in a lower interest rate, or if they want to Change lenders.
However, Kantrowitz said refinancing federal loans into private student loans would give up the safety nets that come with federal loans, such as deferment, forbearance, income-driven repayment and loan forgiveness and discharge options.
As with other types of refinance opportunities, extending the term of your loan means you’ll end up paying more interest on your balance.
