Why Now Is the Time to Refinance Your DebtBy Jesse Giordano, CFP® | August 29, 2019
Economists and pundits alike have been buzzing since the Federal Reserve cut interest rates by a quarter of a percentage point this summer. After hiking rates four times last year, the reduction marked the first time the Fed reduced rates in more than a decade—when the Great Recession was in full swing.
With the threat of a new recession looming, more cuts may be expected as a way to fuel economic growth. In the meantime, you can expect these new lower rates to directly impact your wallet. They affect everything from mortgages and home equity lines of credit to student loans and credit cards.
That means now is a particularly great time to refinance your debt obligations.
How the Fed’s Decision Impacts Your Finances
Lower interest rates make it less expensive to borrow money. Just look at mortgages. A number of other factors (like inflation and the state of the economy, for example) also impact mortgage rates. The average 30-year fixed rate is currently 3.72 percent (as of 8/28/19); that’s up from 4.66 percent a year ago. In other words, mortgage rates are gradually skewing downward—so it’s an especially smart time to lock in a lower rate now by refinancing your home loan.
The Fed’s decision to lower interest rates will affect more than just your mortgage. Any debt that can be refinanced could lower your monthly expenses, freeing up more cash that you can direct toward other savings goals. Strike while the iron’s hot and review your current debt situation. Is there anything you may be able to refinance? Things like student loans, auto loans and mortgages are all on the table.
You may also want to consider getting more aggressive with any other high-interest debt. With average credit card APRs now sitting at over 17 percent, rate decreases here will be a welcome relief if you’re carrying any balances. (FYI, it will likely take a couple of billing cycles before you start feeling a difference here.) With lower rates on the horizon, it might make sense to “refinance” your credit card balances by consolidating them with a lower-interest card or personal loan.
What to Know About Refinancing
Refinancing any type of debt involves taking out an entirely new loan that has a lower interest rate, then using that to eliminate the existing debt. What you’re left with is a new term and monthly payment that’s more cost-effective over the long term.
Figuring out exactly how to restructure your debt isn’t a one-size-fits-all approach. At Opal Wealth Advisors, we can evaluate your overall financial plan, then recommend the best path forward based on your unique short- and long-term goals. If, for instance, a Mediterranean vacation is on your bucket list, how can we refinance various debts in a way that unlocks the most cash flow to put toward this vision? The same goes for any other big-picture money goals, from retiring early to investing in a new business venture.
Other Ways to Take Advantage of the New Interest Rates
In addition to the refinancing opportunities, the Fed’s announcement to cut interest rates will also affect your ability to save. We can reasonably expect banks to respond to the news by lowering the rates they offer on savings accounts, CDs and money market accounts; not the best news when it comes to growing your wealth.
Consider moving liquid savings out of traditional banks and into a high-yield online savings account instead, which may offer higher rates. Or invest the cash savings into your retirement accounts. Funneling that extra money into your nest egg is an easy way to bump up your savings without affecting your day-to-day spending.
Navigating interest rate changes and responding accordingly isn’t always easy. A lot of moving parts come into play, especially when it comes to shoring up your financial health and making decisions that will ultimately move the needle on your long-term goals. Opal Wealth Advisors can help you unpack the details and keep your personal values front and center.
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