If you are buying a home, own a home, or want to borrow against your home’s equity, the prevailing interest rate can have a marked effect on your decision making. Even if the rate falls a fraction of a percentage point, it could have a positive impact on affordability—not to mention your monthly budget.[1]
When interest rates start to drop, how can you best take full advantage? A lot depends on your unique situation and what you want to achieve. Here are some factors to consider in a shifting rate environment.
Buying A Home
Elevated interest rates can deter would-be homebuyers. Conversely, Peter McCarthy, PNC Bank’s Head of Home Lending, notes that a decline in rates could mean a sharp uptick in buying opportunities.
“When the interest rate environment is promising, more potential homebuyers run the numbers with a mortgage professional. They look at their financing options and feel more comfortable getting off the sidelines.”
If that describes your situation, PNC Bank has an outstanding tool to determine how affordable your home purchase could be.
Our Home Insight Planner assesses your credit score, zip code, and other factors. That way, you have a rough estimate of what a monthly mortgage payment might be. While it’s not a substitute for a formal credit approval, it could prove an excellent starting point for your home shopping.
Refinancing
If you bought a home at a higher interest rate, then you’re keenly aware of how much that mortgage payment weighs on the monthly budget. When interest rates drop, refinancing could potentially make a substantial difference.
In fact, an interest rate that’s even a half-point lower could potentially make a dent in your monthly mortgage payment—money that you could put toward other purposes.
Your first step is to decide if you’re a good candidate for a refinance. Because no two situations are the same, McCarthy points out that it’s always important to look before you leap.
“If you have a large loan balance, a half-point difference in interest rates is generally worth your while. However, it might not be ideal on a smaller loan. That’s because there are costs on any refinance such as closing costs and escrow. Those may nullify any savings you’d achieve with a slightly lower rate.”
McCarthy adds that the expected length of time you plan to live in the home matters, too. “If your home is a long-term investment, then take your closing costs and divide that number by your expected monthly savings to see how long it takes to recoup those closing costs and escrow.”
It doesn’t need to be complicated. Our handy calculator can walk you through the math. Or, if you’d like to explore in greater detail, ask a mortgage loan professional for help.
Renovations
One other scenario: You may be perfectly happy with your address—but higher rates forced you to put off an update or upgrade.
A drop in rates could prove the perfect time to dust off those plans and give your contractor a call. Because lower interest rates make financing through a home equity loan or home equity line of credit (HELOC) a more attractive option.
According to Joe Perveiler, PNC Bank’s Head of Home Equity Product, “It’s important to view any home improvement as an investment that will potentially increase your home’s value. With that in mind, lower interest rates for both home equity loans and lines of credit can quickly change the math when it comes to upgrading that kitchen or adding on.”
If you’re toying with making big changes in the house you love, it’s important to avoid guesswork. PNC’s Home Renovation Calculator can remove plenty of question marks on what things cost and what your rate might potentially be.
