Interest rates are dropping in this uncertain business climate in response to the COVID-19 pandemic. Is now the time to refinance your business loan or mortgage?
For business loans, what you’re going to be able to find seems to be on a case-by-case basis. What ultimately will help you, is business planning and forecasting (cash flow projections, etc.). If you talk to your banker or loan officer with no plan, you’re at a big disadvantage. We’re hearing that with a plan, you potentially may be able to get a loan that allows you to delay making payments for the first few months, making interest-only payments for the first few months, etc. So we recommend creating a 13-week rolling cash flow forecast, and we can help you with that. These types of plans in this environment gives you the edge, as bankers will gain confidence in your ability to manage and make decisions.
For mortgages, Freddie Mac says: “The average rate for a 30-year fixed-rate mortgage was recently 3.3%—down more than one percentage point from the year before—and is probably headed lower. The average rate for a 15-year fixed-rate mortgage was recently 2.8%.”
The general rule of thumb is that refinancing may be advantageous if your new interest rate is at least 0.5% to 1% lower than your current rate. This would allow you to recover your closing costs within a few years, depending on the term of the loan.
Indications are that 30-year fixed rates may drop to as low as 3%, with 15-year fixed rates dropping as low as 2.5%. When should you refinance?
It might be time to refinance if:
- The new rate at least .5% to 1% lower than your current rate
- You have cash flow available to cover the closing costs
- The term of the new loan is comparable to the number of years left on your original loan
- You have a good credit score
There are online mortgage calculators to help you determine payments based on various interest rates. Your banker or mortgage broker can provide information about the rate, term and closing costs to expect. Plug in the information based on new rates compared with your current loan to decide whether it makes sense for you to refinance.
The Bottom Line
As always, Hare CPAs is here to provide counsel and additional information. Contact us to learn more!