26 Sep Does It Make Sense to Refinance? Here’s the Trick to Knowing If Now Is the Time
We all have that friend or relative. “The time to refinance is now! Rates are crazy cheap!”
It is true that interest rates are currently at historic lows, even as the Federal Reserve is likely to raise rates in 2022 to combat inflation and COVID-19 hangover effects. Low rates, coupled with a massive buy-back of federal bonds, have driven down the cost of debt dramatically. These are excellent conditions for considering the refinancing of existing debts.
Refinancing is a financial tool to lower the interest rate and adjust the term on an existing debt by paying off the existing loan and replacing it with a new one with better terms. This is a common tactic with mortgages and student loans when rates are affordable.
A conventional 30-year mortgage currently has an average interest rate of 3.50% (as of 1/18/2022) for a qualified borrower. Student loan companies are offering interest rates at around 2.5% (as of 1/18/2022). But even with these low rates, how can you know if rates are low enough to warrant the effort?
Here’s the easiest way to know: if your loan has an interest rate that is at least 1.0% over the going category benchmark, the effort and cost of the refinancing would / could be favorable to you, the borrower.
And if you are still unsure if refinancing is right for you, sit down with a wealth planner and fully understand your options. Try not to let your hesitation keep you from benefiting from an excellent rate!