So Britain actually voted to leave the EU. If you called that right and bet against the stock market, the pound or almost anything, you likely had a profitable week. The uncertainty caused by the vote has resulted in a mass exodus from many investments and the loss of a staggering amount of wealth.
However, when people exit riskier investments they typically seek out safe options, like U.S. Treasuries. Combined with the fact that investors are buying Treasuries (which lowers rates) and the fear of a new recession, which could reduce the possibility that the fed will raise rates in the near future, the 10-year Treasury is trading below 1.50 percent as of the writing of this article. Who knows where it will be by the time you read this, which is actually the main point of this article.
Unfortunately, your 401K is probably lower today, as is your stock portfolio. Should you become more aggressive and buy now that stocks are on sale? Should you sell and move into cash to be more conservative as you wait out the confusion? Should you just stay put and not do anything and try to ignore the headlines for the coming months? Regardless of what route you take, you are making a decision that will have possible financial ramifications depending on how the situation plays out.
There is one very easy choice. Interest rates have dropped, and if you are a candidate for refinance, which you likely are, you can lower your monthly payments. Should you consider changing to a 15-year or a 10-year arm? Perhaps!
However, let’s focus on the easiest possible decision. If you are able to lower your rate and have no costs, why wouldn’t you do it? Some people will state that they are waiting for rates to get even lower. It is certainly possible for rates to drop further, but if you are protected on both the downside as well as the upside, why take the risk and wait? Imagine, you are buying a stock at $50 and the seller tells you that he will buy back the stock at $49 if it drops. You profit if the stock goes up and you can back out of the deal if the price goes down. Would you wait, hoping the stock drops more and risk not buying at all?
This is similar to the scenario with regards to locking a mortgage loan. When you lock a mortgage loan you are protected against rates going higher for the term of the lock. However, if rates later drop, you can refinance and get a new loan with the new low rate, similar to giving back the stock at the higher price and buying new stock at the lower price. The point is ¼ percent often covers all the costs of the transaction. If you reduce your rate by enough to cover the costs, it could be worth refinancing.
In addition, most banks have a float-down feature that, during the process of the loan, allows you to lower your rate if rates drop prior to closing. There are typically some requirements whereby some of the benefit is not passed on, but if there is a large drop in rate you will be able to benefit.
The choice is yours. Make your current payment or contact your lender and see if you can get a better rate. Ask your lender what the rate will be if they absorb the costs and then you’ll have an apples to apples comparison.
Before you make your decision, call your bank and ask them what rate they will give you. Banks reward relationships and just might give you a better rate. In addition, if your bank is servicing your loan, you’ll have more leverage if any issues arise in the future and you want more than just a customer service person from across the globe trying to help you resolve your issue. There is a large cloud looming on the financial horizon. Find the silver lining and see if you can reduce your monthly payments by refinancing.
By David Siegel
David Siegel is a home lending specialist with Citibank in its Englewood office. Siegel can be reached at [email protected] or 201-419-1330.
