Factors to consider before refinancing a loan, according to experts

By Finance News On Sep 23, 2024

Moyo Studio | E+ | Getty Images

The Federal Reserve announced a half percentage point, or 50 basis points, interest rate cut at the end of its two-day meeting Wednesday. And, naturally, some Americans will want to make the most of the central bank’s first rate cut since the early days of the Covid pandemic.

“How quickly the impact of lower rates is felt depends on whether households have variable or fixed financing rates” said Stephen Foerster, professor of finance at Ivey Business School in London, Ontario. Some adjust fairly quickly, others don’t reset at all.

That is, unless you can refinance.

According to a recent report from NerdWallet, 18% of consumers said they planned to refinance a loan once rates go down. The financial services site polled more than 2,000 U.S. adults in July.

While taking advantage of lower rates could make financial sense, there are often other considerations, as well, depending on the type of loan, experts say.

No ‘universal rule’ for refinancing a mortgage

For starters, while mortgage rates are partly influenced by the Fed’s policy, they are also tied to Treasury yields and the economy. So, home loan rates may continue to fluctuate.

Further, most homeowners still have a lower rate on their loan than what they could likely get if they were to refinance now — with the exception of those who bought a home within the last two or three years, according to Jacob Channel, senior economic analyst at LendingTree.

Roughly, 82% of homeowners are locked in at rates below 5%, and 62% have rates under 4%, a 2023 Redfin analysis found.

Mortgage refinancing boom is already happening, says United Wholesale Mortgage CEO

“There isn’t a universal rule for when people should think about refinancing a mortgage,” Channel said. “Some people will tell you that you shouldn’t think about refinancing until you could get a rate that’s at least 50 basis points lower than what you currently have, others will say that you should wait until you could get a rate that’s 100 or more basis points lower.”

Other factors to consider are your creditworthiness, which will ultimately determine what rate you can qualify for, as well as the closing costs, which typically run 2% to 6% of your loan amount to refinance, according to LendingTree.

“There’s no one-size-fits-all answer to the question of whether or not somebody should refinance their mortgage,” Channel said.

Don’t wait to reassess credit card debt

When it comes to credit card debt, the math is a little more cut-and-dried.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — nearing an all-time high. Those APRs will edge lower now, but not significantly.

No matter what the Fed does, refinancing high-interest credit card debt…