In March 2020, as the U.S. economy was throttled by the coronavirus pandemic, the Federal Reserve instituted a number of emergency interest rate cuts. The cost of borrowing fell to historic lows that the country hadn’t seen since the Great Recession. For borrowers with existing high-interest debt, it was a great time to refinance.
However, now that we’re more than a year past the start of the pandemic and the economy is on the mend, you may be wondering whether you missed your opportunity.
Maybe not, depending on the type of debt you have and how much you can knock off your interest rate. However, refinancing won’t always save you money. Here’s a closer look at what types of loans you should consider refinancing before rates head back up.
Mortgage rates have been somewhat up and down recently. As of April 19, 2021, the benchmark interest rate was 3.07% for 30-year fixed-rate mortgage and 2.41% for a 15-year. That’s higher than rates at the end of 2020, but extremely low in a historical context, says Matt Frankel, a certified financial planner and analyst at The Ascent.
“Not surprisingly, mortgage applications have declined a bit, likely fueled by a combination of slightly rising rates and the fact that so many homeowners have already refinanced over the past year or so,” Frankel says.
But even with rates slightly higher rates than a few months ago, it could still be a smart time to refinance your home loan. Frankel recommends that if the current market interest rate is a half percentage point or more lower than what you're currently paying, and you plan to stay in your home for at least a few more years, it could be smart to refinance.
Refinancing could also potentially be worth it even if your interest rate will stay the same or only go down slightly. “Home prices have soared recently, and you might be able to tap into the equity in your home to help pay off higher-interest debts like credit cards if your home has increased in value significantly,” Frankel notes.
Keep in mind, however, that refinancing isn’t free. You'll likely pay some sort of origination fee, and closing costs can be substantial: 2% to 5% of the total loan amount, typically. The key is to make sure the savings you realize from refinancing justify the cost of obtaining the new loan.
Borrowers with federal student loans should hold off on refinancing for now. That’s because federal loans are currently in emergency forbearance under the CARES Act, meaning borrowers aren’t required to make payments and their loans won’t accrue any interest until at least September 30, 2021.
“Since your federal loans are already at 0% interest, it wouldn’t make sense to refinance them right now,” advises Rebecca Safier, a certified student loan counselor and expert for LendingTree. In fact, because refinancing is only offered through private lenders, doing so could actually hurt federal borrowers. “It would mean you’ll lose federal protections and programs, such as this emergency forbearance,” Safier says. “Turning your federal loans private through refinancing would also make them ineligible for federal forgiveness programs and income-driven repayment plans.”
That said, it could be worth refinancing high-interest private student loans since they’re not eligible for these types of federal programs. “Interest rates are very competitive right now, so it’s worth exploring whether you can snag a better rate on your private student loans,” Safier says. Currently, lenders are advertising rates as low as 3.34% for borrowers with good credit.
And though private loans don’t qualify for federal protections and benefits, some lenders offer similar perks. “Besides searching for a lower interest rate, find out if the new lender offers any protections, such as forbearance in the event you lose your job,” Safier recommends.
Credit cards usually come with double-digit interest rates, so refinancing an existing balance could save quite a bit of money. There are a couple of ways to go about it.
The first is transferring the balance to a 0% APR card. Many credit card companies offer zero interest on balance transfers from competitors for anywhere from 12 to 18 months after the transfer. Usually, there is a one-time fee of 1%-3% of the amount transferred. However, this could be well worth paying in order to have 100% of payments go toward paying down the principal for a year or longer. The key is paying off as much debt as possible before the interest rate resets, especially since the new rate is often quite high.
The other option is to consolidate one or more credit card balances (plus any other high-interest debt you may have) into a lower-interest personal loan.
However, it’s important to watch out for debt consolidation or loan options with upfront fees or financing, says Lauren Anastasio, a certified financial planner at SoFi. “There are many predatory lenders out there and they aren’t always easy to identify,” she said. Look for lenders that offer personal loans without any application fees or upfront finance charges.
Anastasio said you should also pay close attention to your proposed installment payment on the loan. “Minimum payments on credit cards are often a small percentage of your balance, and even consumers who have balances on multiple cards may find that the proposed monthly payment on a consolidation loan is much higher than their combined minimum payments.” Be sure you can handle a potentially significant cash-flow adjustment before committing to refinancing your credit card debt.
If you bought a car a couple of years ago when your credit was in bad shape and got stuck with a double-digit interest rate, it could be worth looking into refinancing, according to Greg McBride, chief financial analyst at Bankrate.com. That’s especially true if your credit has improved significantly since you first took out your loan.
“A successful auto refinance means you have to cut the interest rate significantly -- say, from 10% to 5% -- but not stretch the loan term beyond what is remaining on your existing loan,” McBride says. For example, if you have four years left on your original loan, refinancing to a new loan longer than four years will almost certainly cost you money in the long run. “Cars are a depreciating asset, so you don't want to extend the loan term," he adds.
Crunch the numbers first
Although it seems the U.S. is recovering from the financial devastation caused by the pandemic, 2021 still promises plenty of refinancing opportunities. It will likely remain a good time to refinance until the Fed begins raising rates again, which Fed Chair Jerome Powell recently stated won’t happen anytime soon.
You shouldn’t wait to refinance debt if you know it’ll save you money, but there’s also no real pressure to rush into it. Ultimately, you’ll need to consider interest savings in comparison with any closing costs and other factors to determine if refinancing is worth it. There’s a chance it may not.
This story was originally featured on Fortune.com