What Do I Do When Interest Rates Drop?

Whenever interest rates fluctuate, it’s news. And inevitably, a stern-looking financial analyst will be given a guest spot on the news to talk about how interest rates impact the country at large. But the bigger question is, how do changing interest rates affect you?

Here’s a rundown of what to expect when interest rates drop, and what it means to you based on your current situation.

Current homeowners

• Equity sharing – Whether interest rates drop or skyrocket, your equity sharing agreement isn’t affected. It’s not a loan and doesn’t carry an interest rate at all because it’s not debt.

• Refinance – This is the biggest benefit to lower interest rates: the potential to lower your monthly mortgage payment. If you have a fixed-rate loan, consider refinancing if the new interest rate is at least one point less than your current interest rate. Refinancing does carry costs (typically similar to the closing costs you initially paid for your house), but those costs are absorbed into the new mortgage amount. Refinancing lowers your monthly mortgage payment and you can even elect to change your mortgage from a 30-year loan to a 15-year loan, which dramatically decreases the amount of interest you’ll pay over the duration of the loan.

• Adjustable-rate mortgage – If you have an adjustable-rate mortgage, this is a perfect time to refinance and get a fixed-rate mortgage at a lower rate. But even if you don’t refinance, the new lower interest rates will automatically impact your monthly mortgage payments the next time your rate adjusts.

A word of warning: When interest rates drop, lenders will likely push home equity lines of credit (HELOC). A HELOC allows homeowners to borrow against the equity in their home, with the flexibility to only borrow and use what you need, when you need it. But a HELOC may not be your best option for freeing up cash. That’s because the rate is variable and can change as frequently as daily. While it may seem like a tantalizing option while rates are low, the cost of the line of credit will increase as soon as interest rates begin to rise again.

Future homeowners

• Buy a house – When interest rates are low, this is the ideal time to buy your first home. At the low interest rate, you’ll pay less for your house over the duration of the loan, which means a lower monthly mortgage amount and a lot of money saved. Of course, buying a home is a huge cost, and if you don’t have 20% of the home’s cost for a down payment, you’ll likely be paying PMI (private mortgage insurance) and may not qualify for the lowest interest rates.

Whether you’re a prospective homebuyer or a current homeowner, you can save a great amount of money in the long run when interest rates fall. And if you’ve used an equity sharing agreement to tap into your equity… well, you can blissfully click away, knowing that even the highest interest rates won’t affect your agreement.