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  • 5-Minute Article
  • |
  • Sep 16, 2020

How Low Interest Rates Create Money-Saving Opportunities

Learn how rates can impact mortgage, consumer, and student loans.

Created in collaboration with Kiplinger, modified with permission for use by Brighthouse Financial.

Questions this article can help you answer:
  • Is now a good time to refinance my mortgage?
  • Will Federal Reserve rate cuts lower my credit card bills?
  • How do rate cuts affect federal student loans?

In 2020, the 10-year Treasury note met an all-time low and the Federal Reserve Board cut the federal funds rate in response. Interest rates for consumer loans also fell. Even mortgage rates dropped to the lowest rates ever recorded in Freddie Mac’s survey, which dates back to 1971.

For borrowers, falling rates (whether now or in future years) generally signal money-saving opportunities on everything from mortgages to credit card debt to student loans. To gauge the impact of lower rates on your financial situation, connect with your financial professional and consider these three questions:

 

1. When does it make sense to refinance my mortgage?
 

If your mortgage rate is more than one percentage point above current rates, it’s usually a sign that it makes sense to consider refinancing.1 But you may benefit from refinancing even if your new rate would be less than a full percentage point lower.

Closing costs for refinancing typically run between 3-6% of your new loan amount,2 so calculating how long it will take to recoup closing costs – and knowing when you plan to sell your home – is essential. You can do the calculations on your own or use a mortgage refinance calculator to see if refinancing your mortgage is a good option for you.

How Long it Will Take to Break Even on a Mortgage Refinance

When rates drop, there can be a rush to refinance. If you’re a candidate for a refinance, consider waiting until the rush settles down because rates should settle down too. After rates dropped earlier in 2020, the refinance share of mortgage activity was 64%.3

Another consideration is for would-be homebuyers. For those who have been kept out of the market by rising prices, lower rates help make mortgages more affordable. However, in tighter real estate markets, be aware that home prices could increase.

 

2. Can Federal Reserve rate cuts lower the interest I pay on credit cards and other loans?
 

Many consumer loans are tied to the prime lending rate because banks use this rate to set interest rates on many consumer loan products. The prime lending rate can be pushed down when the Federal Reserve Board cuts rates which may help you save on:

  • Credit card debt. Watch your annual statement to see if your rate falls a bit. If you pay off your balance in full every month, then a rate cut will have minimal to no impact on you. However, if you carry a balance on your credit card, then a rate cut may help you see some savings. Another savings option may be to consider consolidating balances to a single card with the lowest rate.
  • A home equity line of credit. Notice that the rate on many home-equity lines of credit will move lower, in line with the prime rate. For some homeowners, the option to tap into home equity can provide more flexible access to cash in uncertain times. Talk with your financial professional to discover what effect leveraging your home’s value could have on your financial plans.
  • A car loan. Track current average auto loan rates based on this weekly survey of major banks and thrifts at Bankrate.com. You may be able to catch a break on a new auto loan as the interest rate tied to your loan can mean a lower monthly payment. Refinancing an existing auto loan may also allow you to shorten the loan term.

 

3. Will my federal student loans cost less?
 

For families who expect to offset education costs with a student loan, lower interest rates could also reduce borrowing costs for federal loans.

Student loans are influenced by the Federal Reserve rate – which means that rates for federal undergraduate, graduate, and Parent PLUS loans will be lower for new loans disbursed for the 2020-2021 academic year.

Borrowers can’t refinance existing federal student loans to take advantage of more attractive rates, but they may be able to secure lower rates by refinancing federal loans into private student loans. That move shouldn’t be taken lightly, however, because when refinancing to a private loan, valuable benefits associated with a federal loan – such as forbearance or deferment options – are forfeited.

Even if you’re a good candidate to refinance your federal loans, you may want to put it on hold in times of economic uncertainty – especially if other forms of economic relief are being offered. In response to today’s current economic climate, for example, recent legislation is providing student loan borrowers with flexibility through temporary payment relief for six months along with a 0% interest rate.

Read Should I Retire With a Mortgage? and speak with your financial professional to help determine whether paying off your mortgage before retirement makes sense for you financially.

 
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