Rates are Dropping, What Should I Do?

Last week I shared the news article after a historic 0.5% Federal Reserve rate drop. Normally they are about a quarter of a percentage point, but this time it was a half, which is pretty significant. As of today, it sits at 4.83%.  If you look at it over the last 62 years, it was over 20% in the 80s but spent from 2010 to 2020 at historic lows of 0.9% and below. Then in 2022, to attempt to fend off inflation and other economic factors it climbed steadily up to over 5% until the recent drop.

* Good Article Showing the timeline - Click Here

What does all this mean? Simply put, it is a target interest rate for banks to borrow and lend their excess reserves. This typically impacts interest rates. If they expect to get 5% on their excess, then they are not going to loan money out for less than that, they are also not going to give you a higher percent than that in your savings either.  So slowly mortgage rates are going to come down a little along with other rates.

Unfortunately, that means savings account rates are going to come down too. Simply put, savings accounts for the last several years have been low...0.1%, 0.5%, etc. That is directly -in line with the correlation above and the same goes for mortgages, car loans, etc. Now savings accounts are at highs, seeing over 5% earlier this year, but in contrast, mortgages, car loans, etc. kept climbing. This means some of you have 7% or higher mortgages and have you hoping for a refinance to drop that rate down. Let's get into the numbers to see when this makes sense for you to do.  

Note some things to consider:

• Closing costs: When you refinance, you will take on closing costs. Ideally, you want to pay these out of pocket so that you can keep the mortgage payment down, but you are going to take a hit on that.

• Interest over time: 1% may not seem like much but over time, it will certainly have an impact, which I will show you below.

• Home equity: If you are refinancing and have less than 20% down, there is a potential that you have increased your equity and may be able to avoid Private Mortgage Insurance (PMI) if you have built up enough equity, due to the housing demand or just by paying down your principle.

Everyone's loan is different so I'm going to run with a few key numbers to help you understand.

Current Mortgage Rate: 7.9%

Market Mortgage Rate: Reducing from 0.5 to 1.5%

Principle: $200,000 (Starting)

Terms: I'll do both 15 and 30-year terms. I'm a big fan of 15, but I know many have 30-year terms out there. With that, I'm going to assume you have a 7.9% for a 3 and a 7.5% for a 15 (slight reduction due to shorter term).

No Extra Payments: I'm going to just show the change in cost, without taking into account the amount you have already paid down. In any loan, the first year is mostly interest, so on a $200,000 loan, in year one you might have only paid about $10,000 in principal down, for simplicity I will ignore that.

Closing Costs: These will vary, but I'm going to just assume $3,000 for simplicity.

Why does all this matter? I just want you to have some information and some facts before you start thinking about refinancing. Most people are only looking at the payment reduction, but I want you to think beyond the monthly payment. Usually, you want to get at least 1 to 2% down before considering the move because of the numbers above. 0.5% is not enough to worry about. You also want to take into account closing costs every time, so you do not want to keep doing this multiple times throughout the year. A 0.5% reduction on a 15-year, only saves you $10,000 and that does not take into account the closing costs. When you hit 1.5%, now you are saving $30,000 over the life of the loan for a 15-year, or on a 30-year, $72,000. Now on a 30-year, the numbers look a bit better for the 0.5% drop but realize that is over the life of the loan. My hope is that you are paying this off faster so there are more factors to consider. If you keep refinancing for every 0.5% drop you are barely reducing your payments, and paying a good deal in closing costs each time.

Need some help breaking all this down, I have time available and love to talk numbers and how this can impact your financial life. Check my calendar above and let's have a free consult. We can talk numbers, planning, and how to get things together for your future.