Not everything to come out of the recession was bad news. One of the best things that happened thanks to the recession was a downward pressure on interest rates. The Federal Reserve Chairman, Ben Bernanke, sets the interest rate based on the country’s economy. Recently, Bernanke announced that the Fed would keep rates low (near 0%) through 2015 or until the unemployment rate falls below 6.5%.
The rate set by the Fed is how much banks pay for money, and when the rates are low for them, they are typically low for consumers as well. Right now, mortgage lending rates are nearly the lowest they have been in decades. A 30-year fixed mortgage is at 3.75% and a 15-year fixed mortgage is at 3.0%. (We don’t recommend choosing adjustable rate mortgages).
These rates mean a lot to homeowners and potential homeowners. When rates are low, more people can qualify to buy homes, and the homes you do buy cost less per month to own. A $200,000 house would cost less than $1200 per month, without taxes and insurance, at these low rates, where the same house would have cost nearly $2000 per month at 8.75% interest. In addition to making the monthly payment more manageable, lower interest rates also mean you pay less interest over the life of the loan. The difference between 3.75% and 8.75% on a 30-year fixed mortgage is $291,226!
If you already own a home, you can take advantage of these low rates by refinancing. Refinancing is the process of obtaining a new loan, either with the same lender or a different lender, on an asset you already own. When refinancing your home, the new loan pays off the existing loan and can often include additional money in your pocket for things like home improvements or to pay off other debts. You can either shorten the term of the loan or extend it back out over 30 years again, which can lower the monthly payment even more. When you consider that the average credit card interest rate hovers around 16-18% and a home loan can be had at 3.75%, there’s no question that it can cost you less to refinance, take cash out, and pay off your credit debt. If you’re not comfortable adding more debt to your mortgage to pay off your credit cards, you can simply use the money you save on your monthly house payment to pay down credit debt.
When deciding whether or not to refinance, the rule of thumb is that you can typically recover the cost of refinancing if you plan to remain in the home for longer than two years. If you are under water on your mortgage or if the value of your home is less than it was when you bought the home, you may qualify for special refinance programs like HAFA and HAMP. To learn more about these programs, visit Making Home Affordable, the official government information site for special lending and refinance programs.