Changes in the interest rate on which you will have to pay back the money you have borrowed are a major factor in deciding to refinance; if market conditions drive rates downward, now might be the time. But before you decide, make sure that your rate is in line with your overall goals.
Debt consolidation: Taking a single loan to pay off several debts combines a number of obligations into one loan with payments and total cost of interest that is lower than the previous cost of paying the individual debts.
Monitor Interest Rates
Interest rates have an important role in market volatility. High interest rate leads to people making decisions to pay less, hence slowing down the economy and creating unpredictable movements within the system. The link between interest rates and market volatility can be used by people who have to make investment decisions.
Given how much the market response to central banks’ monetary policy tools and forward guidance affects expectations about the future path of interest rates, it is vital to watch central bank actions.
Other economic data and geopolitical events can also contribute significantly to market volatility. For instance, when interest rates were low in the 1990s in a bid to bolster growth in the tech sector, this contributed to overinflate the size of the dotcom bubble, which burst when interest rates were moved up in turn, an example of how supposedly market-caused ‘animal spirits’ can create ‘surprise’ shocks in rate moves. Tying your financial goals explicitly to a financial plan might help you navigate this instability more successfully.
Lock in a Rate
But at each refinancing step, you should ask your loan officer about rates and loan products, so he or she can help you decide which rate will improve your bottom line and help you choose among them.
A rate lock protects a buyer from the ups and downs of market volatility until closing on a specified rate.
Mortgage interest rates are incredibly dynamic, and depend upon a myriad of economic and macro-economic considerations such as labour-force participation rates, stock market crashes, and events in the global sphere. Increasing economic growth can lead to rising rates, while slow-growing or negative growth economies have the potential to lead to falling mortgage interest rates – both factors can lead to a substantial difference in the price of a home-loan interest rate.
Fixed-rate loans have interest rates that don’t change over the life of the loan. Variable-rate loans fluctuate depending on market conditions. When deciding between the two, choose based on your goals. If you have rate locks, inform your lender of the progress and make sure all the documents arrive in time.
Consider Your Options
Refinancing is a great strategy if your incomes are stable, but when the economy is doing wild stuff, it’s even better. Before you start refinancing for the sake of it, though, it’s important to have some goals in mind. You can use the equity to invest in something else, whether it’s another property or shares in the stock market. Often you want to refinance to reduce your monthly payment, or perhaps you even want to cut the term in half.
Homeowners could refinance from an ARM to an FRM, saving over the life of the loan on interest costs while smoothing monthly payments, at the cost of likely extending the term of the loan. Think long and hard about what to do before you take action.
Closing and other costs also have to be weighed if you’re refinancing. One general rule is to refinance if you’ll lower your interest rate by one full percentage point or more; watch out for ‘no-closing-costs’ offers, too, which might have higher rates to cover them; and make a careful cost-benefit analysis, then have all paperwork readied ahead of time, preparing for and following the process to make it as painless and swift as possible.
Be Patient
Refinancing often takes weeks, and sometimes months, to complete. Borrowers with a mortgage might start a process to refinance with the hopes of lowering their monthly payment, saving interest or gaining access to home equity but, in order to be successful, it’s important to know your goals and financial objectives before starting the process.
Refinancing is a smart move that can save you thousands over time, such as if you got a 30-year mortgage and rates had been sitting at 5 per cent for a while and have fallen below that recently. Refinancing into a 15-year loan to cut both payments and total interest for the life of that loan is a no-brainer. However, with an adjustable-rate mortgage (ARM), which adjusts at some set interval, you’re probably better off staying put.
In a volatile market or economic period, it’s best to weigh your choices carefully before refinancing to ensure you select the option that will work best for you, your finances, and what you hope to achieve in the long run. Speak with your financial professional to obtain advice specific to your own needs and plans – and get yourself prepared for whatever the markets may provide! Each refinancing decision comes with closing costs that must be recouped through reduced payments – make sure you correctly calculate your break-even points!
