The Feds Just Lowered Interest Rates! So Should You Refinance Your Mortgage Now?

Lower interest rates offer you a chance to save on interest. How much depends on what kind of refinance loan you take out. / Getty Images photo by JayK7

Yesterday (September 18th), the Federal Reserve cut the interest rate it charges banks for short-term money by half a percentage point, to a target range of 4.75 to 5 percent.

That move has led many homeowners to think about refinancing their mortgage loans to save on interest. And fortunately, mortgage rates have fallen in anticipation of this move.

This means we can expect to see a wave of refinancings for the rest of the year, according to Adam Funck, chief mortgage officer at Garden State Home Loans, a division of OceanFirst Bank in Toms River, N.J.

A lower interest rate should cover the cost of refinancing

If you plan on riding that wave, Funck says, the first thing you should do is make sure you will save real money by refinancing. “At the bare minimum, people want to be looking to save at least a half percent on their rate, although given how high rates were, if you can save a full percent, that’s going to be far more fiscally worth it.”

Funck adds that if the savings aren’t big enough to cover the cost of refinancing the mortgage in a short time period, you shouldn’t refinance.

You can save even more through debt consolidation

The next thing to consider is whether you can consolidate your debts at a lower rate by refinancing. “Let’s say you bought a home a couple of years ago,” he says. “And because of how quick home values have appreciated, you can just look at doing a rate term finance, which lowers your interest rate.

“But if you’ve got a lot of high-interest credit-card debt or car loans or student loans, the new rate on your mortgage would be less. So you would also look at a cash out refinance to consolidate that debt, which will save you more in your total monthly debt obligation payments.

Depending on how you refinance your mortgage, you could save a substantial sum in interest. / Getty Images photo by Krisanapong Detraphiphat

A shorter-term mortgage could save you even more

You can also save a good chunk of change on interest by going for a shorter-term loan. Funck says this might be the best way to save on interest if you can currently swing your monthly payments.

“Maybe you look at a 25- or a 20-year term, though those payments will be a bit higher because the loans are shorter,” says Funck. “But if you’re only a year or two into your mortgage and can shrink it to a 25, that’s going to save three to four years’ worth of interest just right off the gate. And then, all of a sudden, you’re talking about thousands and thousands of dollars in interest savings because you shortened the life of your loan.

“And if you get down to 20 years, it’s tens of thousands. And if you get down to a 15-year, you’re probably talking more than six figures worth of interest. So don’t just look at ‘How much can I save per month?’ but zoom out.”

Funck says he will be having these sorts of conversations with his clients as they consider refinancing.

It’s best to work with a lender you already trust

He also cautions that lenders will be throwing themselves at you with refinance offers. But, he goes on, “if at the end of the day [a borrower] had a good experience with the person who helped them buy their house, that’s probably going to be the best person to talk to, because they have a better understanding of their larger financial picture.

“And don’t get overzealous with thinking that you should refinance and refinance and then refinance again (when interest rates continue to fall), because you have upfront costs every time you do that. So realistically, knowing that rates are likely to continue to drop over the next 18 months, you should refinance once, probably right around now, and then once again in 12 to 18 months.” Similarly, locking in a lower rate now rather than waiting for rates to fall further will save you more in interest.

“This is where working with someone you trust, who you’ve worked with before, can probably give you more customized guidance to your situation.”