When to refinance your mortgage, car loan, or student loan

The Federal Reserve announced its long-awaited interest rate cuts on Wednesday.

The move could lower some consumer rates. This may be good news for borrowers who want to refinance into a low-cost loan.

“While the broader impact of fee reductions on consumer financial health is not yet fully seen, it could lead to some mitigation from sustained budgetary pressures caused by inflation,” said Michele Raneri, vice president and head of US research and consulting at Transunion.

However, that relief may take some time to arrive.

When the Fed raises benchmark interest rates, borrowing costs tend to rise rapidly, but they drop slowly as they cut. Also, certain obligations, such as mortgages, are affected by the US Treasury long-term debt movements rather than the Federal Reserve benchmark interest rates.

According to Stephen Kates, a certified financial planner and financial analyst at Bankrate, a series of rate reductions may be required to significantly reduce borrowing costs.

“This won’t change someone’s life in one night,” Cates said. “For most consumers, (Wednesday’s cut) is not an event.”

Whether or not you refinance an existing loan with a lower priced alternative generally depends on the type of loan and the financial situation.

This is what you need to know.

Since 2021, the percentage of good mortgages with rates above 6% has more than doubled, according to Bob Schwartz, senior economist at Oxford Economics.

The mortgage rate has fallen sharply at over 7% since its recent peak in January, which has led to a drive in refinance demand.

“We have already experienced low mortgage rates in the past two weeks, giving many homeowners who have purchased their homes in the past three years the opportunity to refinance,” said John Hummel, head of retail home lending at the US Bank.

Bankrate Cates said refinancing debts generally makes most sense when there is at least one percentage point spread between the current interest rate and the new refi rate.

“The more spread, the better it will,” Cates said.

For example, a homeowner with a $400,000 fixed mortgage with a 30-year term and a 7% interest rate could pay around $2,661 a month. (This includes principal and interest, but excludes factors such as insurance and property taxes).

The same mortgage at a rate of 6.25% reduces payments by $198 per month, down to $2,463. The 5.75% interest rate drops another $129 to $2,334 per month.

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However, refinancing your mortgage frequently — for example, every time interest rates drop by 0.25 percentage points — generally not a good idea, Cates said.

This is because it was addressed on each closure fee and other mortgage, he said. Repeated incurring these costs will erode the economic benefits of refinancing.

“You’re probably funding financial education for your mortgage lender’s children rather than you benefit yourself,” Cates said.

Consumers should pay attention to APR (or annual rate), including interest rates and all charges, Cates said.

APRs can make a huge difference in monthly payments, so car loans are the same.

According to Joseph Yoon, Consumer Insights analyst at Edmunds, if you fund your car over the past two to three years and pay more than 7% interest on that loan, this may be an opportunity to earn a lower fee. It will help if your credit score improves since the origins of the loan, he said. (Generally speaking, the higher your credit score, the better you are when it comes to getting a car loan.)

However, if your car loan starts in 2019 or 2020, the APR for the loan may be lower than your current fee.

“We recommend considering refinancing is really dependent on your financial situation,” Yun said.

In all cases, “calculate numbers,” Yoon said. Reducing your monthly payments may be worth having your car payments for extra time and ultimately paying more interest.

Federal student loan rates are fixed, but private loans may have variable interest rates. This means that as the Fed cuts, borrowers with high private student loans could automatically earn lower interest rates.

“A 0.25% reduction in interest rates could reduce the monthly payments per $10,000 borrowed over a 10-year repayment period by about $1 per month,” Kantrowitz said.

Ultimately, borrowers with fixed-rate private student loans, or even federal loans, could be able to refinance into cheaper loans if interest rates are falling, Kantrowitz said.

In this case, there are no advance penalties or transaction fees for federal and private student loans, so borrowers will refinance multiple times if interest rates are lower.

However, refinancing federal loans with private student loans is not a generally good idea, experts say. By doing so, we will refrain from “excellent benefits from federal student loans,” Kantrowitz said.

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