When to refinance a mortgage, car loan, student loan

The Federal Reserve announced a long-awaited rate cut on Wednesday.

The move could bring some consumer rates down, which may be good news for borrowers hoping to refinance into lower-cost loans.

“While the broader impact of a rate reduction on consumers’ financial health remains to be fully seen, it could offer some relief from the persistent budgetary pressures driven by inflation,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.

But that relief may take a while to arrive.

Borrowing costs tend to rise quickly when the Fed raises its benchmark interest rate — but fall slowly when it cuts. And certain debts, like mortgages, are influenced more by movements in long-term U.S. Treasury bonds than the Fed’s benchmark interest rate.

It may take a series of rate cuts for borrowing costs to come down noticeably — and for a refi to make sense, according to Stephen Kates, a certified financial planner and financial analyst at Bankrate.

“This isn’t going to change anybody’s life overnight,” Kates said. “For most consumers, [Wednesday’s cut] is a non-event.”

Whether to refinance existing loans into lower-rate alternatives generally depends on the type of loan and your financial picture, experts say.

Here’s what you need to know.

Since 2021, the share of outstanding mortgages with rates above 6% has more than doubled, according to Bob Schwartz, senior economist at Oxford Economics.

Mortgage rates have come down significantly from their recent peak at over 7% back in January, and that’s causing a run on refinance demand.

“We have already experienced lower mortgage rates the last two weeks, giving many homeowners who purchased a home in the past three years, the opportunity to refinance,” said John Hummel, head of retail home lending at U.S. Bank.

Refinancing any debt generally makes most sense when there’s a spread of at least 1 percentage point between your current interest rate and the new refi rate, said Bankrate’s Kates — for example, if a refi can reduce your mortgage rate to 6% from 7%.

“The bigger that spread is, the better it’s going to be,” Kates said.

For example, homeowners who have a $400,000 fixed mortgage with a 30-year term and 7% interest rate might pay about $2,661 a month. (This includes principal and interest, but excludes factors like insurance and property tax).

The same mortgage with a 6.25% interest rate would reduce their payment by $198 per month, to $2,463. A 5.75% interest rate would drop it by another $129, to $2,334 a month.

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However, refinancing a mortgage too frequently — say, every time interest rates drop 0.25 percentage points — is generally not a good idea, Kates said.

That’s due to closing costs and other fees tacked on to each new mortgage, he said. Repeatedly incurring those costs would erode the financial benefit of refinancing.

“You’re funding your mortgage lender’s kid’s financial education probably more than you’re benefiting yourself,” Kates said.

Consumers should pay attention to the APR — or, annual percentage rate — on a loan, which is inclusive of interest and all fees, Kates said.

Car loans are a similar story, since the APR can make a big difference in your monthly payment.

If you financed a car over the past two to three years and pay 7% or more in interest on that loan, this may be an opportunity to get a lower rate, according to Joseph Yoon, consumer insights analyst at Edmunds. It helps if your credit score has improved since the loan origination, he said. (Generally speaking, the higher your credit score, the better off you are when it comes to getting an auto loan.)

However, if your car loan is from 2019 or 2020, your loan’s APR is likely to be lower than current rates, “which makes refinancing a dubious bet at best,” Yoon said.

“Whether or not it’s a good idea to consider a refinance really depends on your financial situation,” Yoon said.

In every case, “crunch the numbers,” Yoon said — lowering your monthly payment may not be worth carrying a car payment for additional time and ultimately paying more in interest.

While federal student loan rates are fixed, private loans may have a variable rate, which means as the Fed cuts rates, borrowers with variable-rate private student loans could automatically get a lower interest rate, according to higher education expert Mark Kantrowitz — although any decreases in interest rates will be relatively small.

“A 0.25% decrease in the interest rate might reduce the monthly payment by about a dollar per month per $10,000 borrowed on a 10-year repayment term,” Kantrowitz said.

Eventually, borrowers with fixed-rate private student loans, or even federal loans, may be able to refinance into a less expensive loan if interest rates keep coming down, Kantrowitz said.

In this case, there are no prepayment penalties or transaction fees for federal and private student loans, so borrowers can refinance their loans multiple times if rates continue to fall.

However, refinancing a federal loan into a private student loan is generally not a good idea, experts say. Doing so will forgo “the superior benefits of federal student loans,” Kantrowitz said, such as better deferments and forbearances, income-driven repayment plans and loan forgiveness and discharge options. 

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