Interest rates are back at historical lows. The decline in interest rates have been a by-product of an accommodating Federal Reserve, which recently cut rates, as well as a decline in the yield of the 10-year US Treasury bond. But what does this mean for you? It may be time to revisit your loan and see if you can save money by refinancing into a historically low rate.
Where Are We in History?
The chart below illustrates the average interest rate for a 30-year mortgage over the past 40+ years. As we move from left to right, we see that rates have been steadily trending down since the 1980s when inflation ran rampant and interest rates spent most of their time above 12% - even peaking at 18% in 1981! This is in stark contrast to today’s rate of 3.64%.
Rates have continued their downward trend throughout the current decade with momentary upticks. The upticks are highlighted in the chart below.
The periodic upticks are what you should be aware of. Did you refinance during an uptick? Did you purchase a new home during an uptick? Did you get an adjustable rate during an uptick? In fact, if we look at the various interest rate ranges over the past decade, we see that almost 60% of the decade was spent above 4%.
What should be even more striking is the recent change in rates. In less than a year, interest rates have dropped from almost 5% to just over 3.5%.
Does It Make Sense to Refinance?
There are a lot of variables to consider when refinancing.
Refinancing usually has associated costs that need to be taken into consideration, such as closing and appraisal costs. Calculating the breakeven for the refinance is the best form of analysis.
A refinance restarts the clock on the payment schedule for your new loan. Even though your monthly payments are lower, it may result in paying more in total interest between the two loans.
Loan structure is an important consideration as well- not everyone stays in their home for 30 years and a different loan structure, such as a 15 year fixed or an Adjustable Rate Mortgage (ARM), may make more financial sense.
Long-term rates are usually higher than short-term rates, and so it goes with long-term fixed-rate mortgages versus short-term adjustable-rate mortgages (ARMs). However, with the yield curve inverted, rates on short-term ARMs and 30-year fixed-rate mortgages have become quite close. So homeowners in short-term ARMs may be able to refinance into long-term fixed-rate mortgages, and yet pay about the same rate of interest each month.
Refinancing may turn nonrecourse debt into recourse debt.
What to Do Next?
Check your mortgage interest rate and if you are at or above 4% it is worth revisiting.
Check with your existing mortgage lender about a refinance and see what rates they are offering and the associated expenses.
Reach out to our office to discuss and review your options. We can look at your new rate, existing loan balance, and any associated refinancing costs to determine what makes the most sense for you.
If needed, we can put you in touch with lenders.
Thank you for your continued trust and confidence,
Brickley Wealth Management (“BWM”) is a Registered Investment Adviser. This brochure is solely for informational purposes. Advisory services are only offered to clients or prospective clients where BWM and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by BWM unless a client service agreement is in place.