If you’ve taken the time to scan any of the major news outlets, then you likely know that people are talking about a potential recession. The yield curve has been inverted for quite some time, leading people to believe a recession will happen sooner rather than later.
As a result, the Federal Reserve has been pressured to lower interest rates by the current administration to encourage continued momentum in our economy. In turn, this leads to lower borrowing costs and lower returns on deposit products such as checking and savings accounts. One group of individuals this particularly helps are those in the military. If you’ve been in the military or know someone who has then you’re aware of the less than ideal pay.
However, with programs and the lowering of interest rates, now is a perfect time to look into refinancing your home.
Mortgage Rates Fall to Historic Lows
Mortgages rates are beginning to fall again back to historic lows. Currently around 3.6% for a 30-year fixed, these rates are essentially as low as they’ve ever been. It’ll be difficult to justify them going much lower, but that depends on factors such as the Fed’s rates and margins at various financial institutions.
Before you look at refinancing your home, it’s important to consider multiple factors such as will you be relocating in the near future. Refinancing your home isn’t as simple as filling out a loan application. Many times it requires an appraisal and tax return documents.
From there, there are costs associated with the application and totaling those up may outweigh the savings benefits of refinancing, in the short-term. Another item to consider before refinancing is what your current rate is versus what your new rate will be. For example, if you’re moving from a 4% down to a 3.75%, while yes, you’ll be saving money on interest, but those savings need to cover your refinancing costs before you truly begin saving money.
A rule you can use is the interest rate for a new mortgage should be around 2% lower than what you’re currently paying for the refinance to make sense. When looking into mortgage rates you can look at what the 10-year treasury is doing, as many institutions use that as a benchmark. Another benchmark is the LIBOR rate, but that benchmark is slowly being phased out as LIBOR will no longer be around in a couple years.
The reason for comparing against the 10-year is financial institutions are in the business of buying and selling money. Lenders, typically part of banks, need to cover the spread from which they can borrow at versus what they lend at.
Homeowners Scramble to Refinance
If you’re in the military and fit all these criteria and are looking to refinance, you can look into several options such as lenders that specialize in active service lending. There are many different aspects military people must consider and being in the military potentially allows for benefits that normal citizens are unable to obtain. These can include lower rates than the standard mortgage, lower down payment amount and flexibility in terms of credit score.
Also, you can look into a VA loan, which is provided to military members and allows them to receive discounted rates and potentially avoiding PMI or private mortgage insurance.
With a VA loan, you have to meet certain requirements so be sure to set your expectation going forward as the process can take a bit of time. Now is a perfect time to refinance, especially if you are in the military. Rates are only continuing to feel downward pressure and if a recession does occur, rates will certainly be forced to stay lower. To keep tabs on the price of mortgages, look at the Fed’s interest rate and the 10-year. As long as those continue downward trends, then 30-year mortgages should as well.
To save money, look into a 15-year mortgage as this will lower your interest expense over the life of your loan.