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You may have noticed recent news stories about the Federal Reserve raising interest rates slightly, after several years of keeping them at historic low levels. This interest rate increase is a sign of a strengthening economy, and as employment figures continue to improve, economists expect coming seasons to bring still more interest rate increases. If you’ve been considering a home refinance, you’re probably aware that the actions of the Federal Reserve Board will have an effect on your decisions. Here’s why it’s a good idea to plan on refinancing your home sooner rather than later:
JPMorgan Chase recently stated that they expect the federal interest rate to be raised again four times during 2016. While these increases won’t immediately affect mortgage interest rates, they will eventually make every type of loan more expensive for consumers.
If you have an adjustable rate mortgage, your payments have stayed low in recent years because they have followed the near-zero federal interest rate. As the Federal Reserve raises rates, however, your mortgage payments will soon follow that upward trend. Even a small interest rate hike can mean serious money for a homeowner: a 30-year mortgage for $300,000 at 4 percent means a monthly payment of about $1,400. If that interest rate goes to 6 percent, the monthly payment will increase to about $1,800, and over the lifetime of the loan you could end up paying an extra $130,000. Refinancing with a fixed-rate mortgage will lock in today’s low interest rates for the entire balance of your loan.
Periods of rising interest rates are good news for people with savings accounts, but bad news for people with debts. If you’re carrying credit card or student loan debt, the interest rates on those will inevitably rise in coming seasons. If you can refinance your house ahead of the wave of rising interest, you can apply some of that cash for the purpose of paying off your higher-interest debts. This is a smart financial move as long as you also change your spending habits at the same time, so you don’t incur new credit card debts as soon as the old ones are paid off.
With some prudent financial planning, you can benefit from a time of rising interest rates and solidify your financial position for the coming years. Owning a home puts you in a great position to lock in today’s lower interest rates through a careful refinancing decision.