Mortgage Rates Are Low: Should You Refinance?Submitted by Bernhardt Wealth Management on September 9th, 2019
Previously on our blog, we’ve discussed the pros and cons of refinancing, and everything we said then still applies: 1) make sure the interest rate is enough lower that you can save real money; 2) evaluate how long you plan to stay in your home to be sure that refinancing makes sense; 3) be aware of all the costs, not just the interest rate; and 4) make sure you’re refinancing for the right reasons.
Still, with interest rates in the news and the average 30-year fixed-rate mortgage at its lowest level in almost three years, many people may be wondering if now is the time to shave off some monthly interest costs and lock in a lower rate for the long term. At this point in time, the key questions to ask, in addition to those above, may have as much to do with the economy as with the homeowner’s particular mortgage.
The main reason that interest rates are low right now is because the Fed is lowering interest rates. Since the end of July, the Federal Reserve has been reversing course for the first time since the Great Recession. During that period, after rapid easing of rates to maintain liquidity during the 2007–08 financial crisis, the Fed began nudging interest rates upward as it tried to keep inflation low while still allowing the economy to recover. But now, when trade disputes with China and related tariffs are rattling the markets and creating uncertainty in the business and industrial sectors, the Fed has judged that rates can fall a bit in order to sustain the longest U.S. business expansion in history, now in its tenth year.
And this brings up an important question for homeowners who are looking to refinance: If the business expansion comes to an end and the economy enters a recession, how will that change your individual situation? Typically, the first worry most of us have during a recession is job security. You should take that into account as you consider the possibility of refinancing. In fact, during a recession, when lending policies typically become much tighter, your employment prospects will be a prime concern of any potential lender.
In a recession, it is common for housing prices to fall. How would your equity hold up in that situation? Also, homeowners should consider their overall debt situation in light of refinancing. Rather than refinancing a mortgage, it might make more sense to work on eliminating other debt, which, in addition to making refinancing easier, would also put the individual in a more favorable position in the event of a downturn in the economy.
On the other hand, refinancing at an interest rate two points or more less than your current mortgage rate could allow you to significantly cut down the size of your monthly mortgage payment. In a recession, when things typically get tight, that could give you some welcome margin in your monthly cash flow. If you are otherwise in a pretty secure financial position, it is even possible that you could obtain a more favorable interest rate if a recession were to develop; the Fed will probably be doing all it can to maintain liquidity, which often entails keeping interest rates low.
One final bit of advice: If you believe the economy is headed for or in a recession, it’s a good idea to avoid adjustable-rate mortgages (ARMs). As the name indicates, ARMs allow the lender to raise the interest rate if certain conditions exist. While an ARM may be attractive initially, it can often end up costing the homeowner dearly in higher interest payments and slow growth in equity. Especially in recessionary environments, a fixed-rate mortgage is usually your best bet.
If you’re wondering about refinancing, or even if you’d like information on the current economy and how it could affect your finances, don’t hesitate to contact your financial advisor.