credit & debt

The Pandemic Gives Borrowers a Break on Rates

Low rates reduce the cost of mortgages and other loans.

As the coronavirus scare pushed the 10-year Treasury note to an all-time low and the Fed slashed the federal funds rate, interest rates for consumer loans also fell, creating money-saving opportunities for smart borrowers.

In early March, the 30-year fixed-rate mortgage stood at 3.36%, and the 15-year fixed mortgage averaged 2.8%. Those are the lowest rates ever recorded in Freddie Mac’s survey, which dates back to 1971. But rates ticked up as mortgage brokers struggled to keep up with demand for refinancing, and many lenders chose to keep rates higher than they would ordinarily be based on the level of the 10-year Treasury.

If your mortgage rate is more than one percentage point above current rates, it’s usually a sign that it makes sense to refinance. But you may benefit from a refi even if your new rate would be less than a full point lower.

Closing costs for refinancing typically run between 3% and 6% of your new loan amount, so knowing how long it will take to recoup closing costs—and when you plan to sell your home—is essential. To crunch the numbers, use The Mortgage Professor’s refinance calculator. You can enter the details of both your current mortgage and your new loan to see how long you’d have to stay in your home to start saving money.

If you are a candidate for a refi, consider waiting until the rush settles down; rates should settle down, too. Would-be home buyers who have been kept out of the market by rising prices stand to benefit from lower rates, but they could also feed home price increases, says The Kiplinger Letter, because inventories remain tight, especially in the hot markets of the South and West.

Credit cards and other loans. Many consumer loans are tied to the prime rate, and the Fed’s March rate cuts pushed the prime down to 3.25%. If you carry a balance on your credit card, you may see rates fall a bit. The rate on many home-equity lines of credit will move lower, in line with the prime rate. You may get a break on a new auto loan, too—the average rate for a 60-month new-car loan was recently 4.46%, down a bit from before the Fed cut, according to Bankrate.com. A 36-month used car loan averaged 4.95%.

Student loans. The plunge in the 10-year Treasury could reduce borrowing costs for students who take out federal loans for the 2020–21 academic year—and their parents could get a break, too. Interest rates for federal undergraduate, graduate and parent PLUS loans issued after July 1 are tied to the rate for the 10-year Treasury at the May auction, which will be held on May 12. If the 10-year Treasury remains at or below current levels—which is highly likely—the rate on undergraduate loans would fall below 3%. Graduate students would pay less than 4%, while the rate on parent PLUS loans would fall just below 5%.

Rates on federal loans are fixed for the life of the loan, so the new rates will only apply to loans issued after July 1. The only way borrowers with existing federal student loans can reduce their interest rates is by re­financing to a private student loan, and interest rates on private student loans have fallen to as low as 3% for a 10-year, fixed-rate loan, says Travis Hornsby, founder of Student Loan Planner, which helps borrowers manage student loans. However, those low rates are typically limited to high-income borrowers with good credit. And when you refinance to a private loan, you give up some federal loan benefits, such as forbearance or deferment.

Even if you’re a good candidate to refinance your federal loans, you may want to put it on hold for now. In response to the coronavirus pandemic, which led hundreds of colleges and universities to send students home, Trump announced plans to tempo­rarily waive interest and payments on federal student loans for 60 days. The details of the waiver were unclear at press time.

If you need to apply for forbearance on a federal student loan, the interest respite could provide real savings. Ordinarily, interest accrues while a student loan is in forbearance, but that won’t happen if interest on the loan is waived.

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