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Interest rates are down again — here's how to tell if it makes sense to refinance your loans

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On Wednesday, the Federal Reserve cut interest rates by a quarter-point. It's the second time the U.S. central bank has cut rates in recent months; the cut in July was the first since 2008. If you have debt — including student loans, auto loans, and mortgages — a rate change may offer opportunities to save money by refinancing.

Here's how to tell when or if it makes sense to refinance as interest rates continue to fall.

How a rate cut affects what you owe

The U.S. central bank cut its benchmark interest rate from the current range of 2%-2.25% to a range of 1.75%-2%.

Does it mean you should refinance your loans? Not necessarily. A small rate cut of 25 basis points by itself isn't likely to generate big savings for you as a borrower — especially since the Fed's rate changes have an indirect influence on many kinds of loans. But now that rates are down 0.5% within in a few months, consumers may feel more of an impact.

"There are some lower rates out there for consumers," says LendingTree chief economist Tendayi Kapfidze. "The smart thing to do is to look at all of your obligations and try to figure out if there's an opportunity to get a better rate."

By refinancing, you could be looking at saving a considerable amount of money every month. "The ability to refinance and save $125 or $150 per month? That's really significant," Greg McBride, chief financial analyst at Bankrate told Grow following the last rate cut, earlier this summer. "But a quarter-point move on things like your credit card, your home-equity line of credit, or even a savings account is really a drop in the bucket."

In other words, the July cut alone may not have provided consumers with a worthwhile incentive to look at their options. But now that the Fed appears to be open to rate cuts, along with a wait-and-see approach going forward, you may want to run the numbers.

For example, as of July, 11.7 million homeowners would benefit from refinancing, because they could already reduce their current rate by at least 75 basis points, according to data from mortgage analytics firm Black Knight. That's up from 8.2 million homeowners who could have benefited from refinancing as of June, and the most people since 2013. And if your credit score has improved since you took out that auto loan or private student loan, you may now qualify for a lender's best rate — which would be even a bit better after a rate cut.

Here's how to think about refinancing when it comes to three common kinds of consumer debt:

Mortgages

"The Fed cutting rates should capture the attention of homeowners who wouldn't normally follow interest rates very closely," Keith Gumbinger, vice president at HSH.com, told Grow in July. The benchmark rate has some influence on mortgage rates.

For its reports, Black Knight typically estimates borrowers would benefit from refinancing if they can get a new interest rate that's at least 75 basis points (0.75%) lower. And Kapfidze says that rates, specifically for home loans, have been on the move lately: "Mortgage rates moved down pretty significantly over the past few months."

Gumbinger warns that borrowers should also factor in closing costs as part of their assessment. For example, he says, refinancing a $200,000, 30-year mortgage with a 4% rate to a 3.75% rate would lower your payment by just $28.60 per month, and entail closing costs of around $3,000. "With such a small difference, it will take almost nine years just to cover the cost of refinancing before any actual savings kick in," he says.

The Fed cutting rates should capture the attention of homeowners who wouldn't normally follow interest rates very closely.
Keith Gumbinger
vice president, HSH.com

Auto loans

Refinancing auto loans isn't something a lot of people do, Brian Moody, executive editor at Autotrader, told Grow this summer: "It's not as typical as it is with home loans." In one 2017 survey from used-car marketplace Instamotor, just 9.2% of drivers had refinanced.

Changes to the benchmark interest rate can have some influence on auto refinance rates offered through banks, credit unions, and other lenders. But it's less direct. After the July rate cut, Jonathan Smoke, chief economist at Cox Automotive, wrote in a blog post that the Fed moves "do not necessarily mean consumers will see any lower rates."

Still, it's not a bad idea to see if you can get a lower rate — especially if you've recently improved your credit score, which tends to have a much more significant impact on the kind of auto loan rate you qualify for.

Student loans

The Fed's actions on interest rates can influence federal student loan rates, as well as private loans that may be pegged to different benchmarks.

A quarter-point rate drop won't result in savings for most borrowers, Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, told Grow this summer. But now that there's a half-point difference or more, it could be worth looking at refinancing.

That's especially true on private student loans, she says. Those tend to have higher rates overall and can also have variable rates, which change over time. Interest rates on federal student loans are fixed, and in recent years have ranged from 3.4% to 8.5%.

How much you could save from refinancing depends on your new rate and the terms of that loan. But be cautious about refinancing federal loans, even if you might see savings. You could lose protections such as forbearance and deferment, and the possibility of using income-driven repayment plans or public loan forgiveness plans.

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