Financial decisions are a little like yard work - people tend to wait for decent conditions before tackling the chore. If it's a rainy day - literally or economically - people tend to hunker down and wait for the storm to pass before doing anything. That can be a mistake when it comes to refinancing.
When the economy starts to look a little shaky or the political landscape a bit rough, it can be a good time to refinance. Here are five reasons why:
- Economic trouble often sends interest rates lower. A slow economy typically means less loan demand, weaker inflation, and looser monetary policy - all factors that contribute to lower interest rates. This is why when bad news hits, mortgage rates tend to dip.
- Get in before lending standards tighten. Interest rates tend to be very fluid, reacting to changes in conditions from week to week. Lending standards change more as a function of formal policy decisions, and therefore evolve a little more slowly. This may give you some time once mortgage rates start to fall to refinance before lending standards start to become more cautious. Don't delay though, because once lenders get nervous, it may require near-perfect credit to get a loan.
- Act before your equity disappears. Refinance rates may fall as the economy weakens, but the bad news is that housing prices may soon follow. Chances are you may need an equity cushion to refinance, so you may want to do it before your home's value slips. Despite low mortgage rates, many homeowners were prevented from refinancing in the aftermath of the Great Recession because of a sustained drop in home prices. The actual recession lasted from the end of 2007 through mid-2009, but housing values started dropping in mid-2006 and didn't bottom out until early 2012. In other words, once home values start to slide, it can take a long time before they turn around.
- Your credit situation might become jeopardized. Along with lending standards and home values, another moving target you face when trying to refinance in a bad economy is your creditworthiness. If a downturn hits, you may have trouble keeping up with the bills, or you might even lose your job. Better to refinance before that kind of damage is done to your credit standing.
- The money you save could be especially useful in a tight economy. Should you make such a big financial decision in the face of a turbulent economy? If it makes your monthly payments more affordable, yes. That extra money may prove critical when times get tough.
When conditions are calm and steady, the mortgage market tends to be pretty efficient, which means that differences among lenders are minimized. However, when the economic weather gets rough, different lenders react in different ways and at different times. This means that it is especially important to shop around, not just to compare mortgage rates but also because you are likely to find important differences in lending standards.
If you take care of refinancing when the economy starts to look a little threatening, you may find yourself very glad you did in the months to come. After all, sometimes the storm gets worse rather than just blowing over.