The global economy has suffered a huge impact by COVID-19. One of the most obvious effects is the decline in Fed Fund Rates.
The Fed Funds Rate is the rate that the Federal Reserve (Fed) loans money to banks. Movement in the Fed Funds Rate represents how the U.S. economy is doing. When the interest rate is low, there is economic or financial uncertainty. But what does the Fed Funds Rate have to do with refinancing your mortgage?
Mortgage Rates Are Not the Same As Federal Interest Rates
In light of the global pandemic, the Fed has cut down interest rates to 0-0.25%.
However, the Fed Funds Rate is not the same thing as mortgage rates. In fact, when the Fed cut interest rates the second time this year, we saw a brief spike in mortgage rates. The interest rate the Fed controls is used as the interest rate for banks and credit unions lending to each other.
Mortgage rates, on the other hand, are determined by the lender and based on a myriad of factors. These factors include the borrower’s credit and history, supply and demand of the market, the liquidity provided to the banks, and the state of the economy. Therefore, mortgage rates may follow the Federal Funds Rate to a degree, but not in tandem.
To Refi or Not to Refi
All that being said, mortgage lenders have cut their interest rates as well. This is to encourage borrowers to apply for mortgages amidst some uncertainty, rather than halting all economic activity.
For those homeowners who already have a mortgage, these new interest rates bring an interesting opportunity to mind: refinance their mortgage to save a ton of money and take advantage of low interest rates or not?
Save Money on Your Mortgage
A lower interest rate on your mortgage can achieve huge savings over the lifetime of the loan. Depending on the size of the mortgage, just a small movement in the interest rate could equate to tens or even hundreds of thousands of dollars you could save!
If you choose to roll over all the equity in your home into the new mortgage, your savings could be well worth the time and small upfront cost of refinancing.
Refinancing Your Mortgage to Pay Off Existing Debt
Another reason to consider refinancing your mortgage is to pay off high-interest debt such as credit card loans. By refinancing, you can cash out some of the equity in your home and use that money toward high-interest debts that would’ve taken years to pay off otherwise.
This method works sort of like a trade-off since you’re trading one debt (high-interest credit card loans) for another (low-interest mortgage). The benefits are realized because you are paying less in interest over the lifetime of your loan. It’s similar to refinancing your mortgage to take advantage of low interest rates, but instead of putting the equity back into your home, you’re applying it elsewhere. Additionally, you may now be able to write off the interest for the new mortgage on your tax return; this is something you cannot do with a credit card.
Low Interest Rates Don’t Last Forever
Many people find themselves in one situation or the other. The opportunity here lies in the fact that mortgage interest rates are low. It would be wise to take advantage of it while it lasts.
Some people are taking the gamble to hold out for even lower interest rates. But without a crystal ball, it’s impossible to say whether that is the smart thing to do or not. Interest rates might go lower, but they might not. What we do know is that they’re already at nearly record lows right now. Seizing the opportunity while it’s here is much better than missing out on it altogether!
If you’re interested in refinancing your mortgage, contact us at Park Place and we’ll walk you through everything you need to know. Don’t miss the chance to see massive benefits from low interest rates!