6 reasons to refinance when rates are rising

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Rising rates tend to discourage homeowners from refinancing, but there are good reasons to refinance even when rates are going up, and even if refinancing means paying a higher rate than you currently have.

“The direction of interest rates shouldn’t impact your decision. Instead, you should refinance when it makes sense to you and based on how long you expect to hold on to the mortgage and property,” says Brian Koss, executive vice president at Mortgage Network in Danvers, Massachusetts.

With that in mind, here are six scenarios for refinancing while rates are rising.

1. Lower your rate and payment

If you don’t already have a super-low rate, you might still be able to get a rate that’s lower than your current one.

“Rates in the 4 percent to 5 percent range are still very attractive,” says Chuck Price, vice president of lending at NEFCU, a federal credit union on New York’s Long Island.

You also should consider the costs. If your new mortgage had costs of, say, $5,000, and monthly interest savings of, say, $200, your payback period would be 25 months.

“If you planned to sell in 10 years, this would make sense, as opposed to if you planned to sell in two years,” Price says.

The risk is chasing a lower rate while extending your term, which could mean paying more due to the longer repayment period, says Kevin W. Hardin, a lending officer with Bank of America.

2. Lock in a fixed rate and payment

All mortgages come with an initial rate that’s either fixed or adjustable. A fixed rate never changes. An adjustable, or variable, rate can change over time. Adjustables, known as hybrids, have a rate that adjusts only after three, five, seven or 10 years.

Adjustable-rate mortgages, or ARMs, have monthly payments that can move up and down as interest rates fluctuate. Most have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a longer period during which the rate changes at preset intervals.

An adjustable rate exposes you to the risk of a higher payment. The closer you are to an adjustment and the longer you plan to keep your home, the riskier the adjustable-rate mortgage is. If you refinance into a fixed rate, the risk goes away.

3. Stop paying mortgage insurance

Private mortgage insurance, or PMI, protects your lender if you don’t pay back your loan.

You’ll usually have to pay for PMI if you make a down payment that’s less than 20 percent of your home’s purchase price when you buy or your equity is less than 20 percent of your home’s current value when you refinance. (VA loans guaranteed by the U.S. Department of Veterans Affairs don’t require PMI.)

Some loans allow you to stop paying for PMI once your equity reaches a certain percentage of your home’s value, either because you’ve paid down your loan or because your home’s value has increased. Other loans require PMI for the loan’s entire term unless you sell or refinance.

Refinancing from a loan with PMI to a loan without PMI might make sense even if your rate is higher because you won’t have to pay the monthly mortgage insurance premium, sometimes abbreviated as MIP.

4. Remove a borrower

Whoever is a named the borrower on a loan is responsible for making the payments. That’s true even if you and your spouse get divorced and your divorce decree assigns responsibility for a loan you and your wife got jointly to you or her solely.

Your lender has no obligation to remove you or your former spouse from your loan, regardless of your divorce agreement. If you’re the one who’s solely responsible, your agreement might require you to refinance to remove your former spouse, even if rates are rising.

If you have a home equity conversion mortgage, or HECM, often called a reverse mortgage, and your spouse was too young to qualify or you got married after you got your HECM, you might want to refinance to add your spouse.

Otherwise, your non-borrower spouse might not be allowed to remain in your home if you die or move out, or for health reasons.

5. Get cash to spend

Another potential reason to refinance your home is to extract cash from equity. The cash can be used for any purpose, such as remodeling or making repairs to your home, starting or expanding your own business, paying off other debt or paying medical, legal or education expenses.

Expensive needs and wants exist regardless of rates, which suggests homeowners might want to refinance to take cash out even if their rates are rising.

Whether cashing out makes sense depends on your perceptions of the benefits and risks.

“All good reasons to refinance can become bad if done at the wrong time,” Hardin says.

Another option might be to get a home equity loan or line of credit instead of a new first mortgage. The rate for your second loan might be higher, but the principal will be less and the term shorter.

6. Get cash to invest

Rising home values create opportunities to refinance and extract cash to invest in other assets.

This strategy could make sense if you can pay your new mortgage without counting on your investment gains, take advantage of the income tax benefits, afford to lose the money you invest, have excellent credit and plan to keep your home a long time, says Mike Windle, financial adviser at C. Curtis Financial, an investment advisory firm in Plymouth, Michigan.

That’s a lot of ifs, and there are multiple risks as well. Your investment returns might not exceed your interest expense. You might lose a significant chunk of your principal. Or your house could decline in value and you might not be able to sell it for enough to pay off your loan.

How Brexit will affect your finances

In less than a year from now – on March 29, 2019 to be precise – the UK is scheduled to leave the European Union.

Although much of the political debate has been over the rights of citizens to move within Europe and the pros and cons of the Single Market, Brexit will also have an affect on our everyday finances.

Here we look at how this might affect savings, business and credit cards in the UK.

Interest rates

On May 10, the Bank of England announced it was not changing interest rates, which would stay at 0.5%, amid fears that the UK economy was too fragile to cope with a rate rise.

This is good news for borrowers, including those people with credit card debt and mortgages, but bad news for savers. Consumer price inflation is currently at 2.5%, which means that the real purchasing value of savings is being eroded.

Fitch, the ratings agency, said the household savings ratio (relative to income) was now 4.9%, a historical low. It forecasts that the UK base interest rate will rise gradually to reach 1.25% by the end of 2019.

“The impact of the Brexit referendum on real wages may be fading, but Brexit uncertainty creates risks of a bigger shock to growth and employment,” it says in a Special Report “Weakening UK Household Finances Pose Risks” published on May 8.

Foreign exchange rates

The value of your holiday pound, and the exchange rate you get when you use your credit card to spend abroad, are affected by foreign exchange (forex) fluctuations.

As of May 2018, sterling is worth just over 1.13 euros, compared with May 2016, when it was worth 1.3 euros, and July 2015 when it reached a ten-year peak of 1.44. Since July 2016 it has traded within a range of 1.08 to 1.12 and has recovered from its low of 1.07 soon after the Brexit result.

GBP vs. EUR for the last five years

Xe.com

When you make overseas purchases using your credit card or debit card, your provider applies a foreign currency conversion rate. This rate will be affected by the variations in the value of the pound, and any volatility in exchange rates.

If the Brexit talks look as though the UK is failing to secure a good deal, sterling may fall again. The Bank of England may have to raise interest rates to protect the pound.

Angus Dent, CEO of ArchOver, a peer to peer lender, said: “With Britain’s GDP growth at just 0.1%, it’s no surprise that the Bank of England has kept interest rates at 0.5%. [The] decision is yet another result of the uncertainty surrounding the UK’s financial health. And keeping rates so low means savers lose out once again.”

Credit card rates and rewards

While interest rates remain low, credit card companies are unlikely to increase their own interest rates. However, the era of rewards and benefits for holding a card seems to be at an end, says Andrew Hagger, founder of MoneyComms, the money information service.

“The only decent rewards you get now is if you use a card to buy items within a certain store – for example using a Tesco card to shop instore. If you use the Tesco card, or ones from M&S, John Lewis and Sainsbury’s outside their own shops, the rewards are slim. I don’t see any major changes in the pipeline.”

Credit card fees

Until the Brexit deal is finalised, the government in the UK has to comply with EU directives. After Brexit, all existing European law will be incorporated into UK law.

This includes a ban on credit and debit card surcharges and applies to all purchases made within the European Economic Area (EEA). It means airlines can’t add hidden charges for online bookings. There are unlikely to be any changes in the short term, as Teresa May has heralded this move as a victory for consumers.

Savings compensation

If you have savings with a bank or financial institution that goes bust, you’ll be compensated by the UK’s Financial Services Compensation Scheme (FSCS).

The compensation limit is £85,000, equivalent to the €100,000 deposit protection limit in the EU. Similar terms are likely to be included in UK law when the changeover happens. Read more about compensation limits on the FSCS website.

Interchange fees

The EU put in place a 0.3% cap on credit card interchange fees that was aimed at reducing the cost of card payments. The UK Cards Association estimated that almost £900 million in savings should be passed onto consumers.

Interchange is a fee paid by the retailer’s card acceptance provider to the consumer’s card issuer each time a card payment transaction occurs.

The cap on fees applies on most product types within the European Economic Area (EEA).

This will become law in the UK after Brexit, and is unlikely to change, says Andrew Hagger, of MoneyComms.

“All the EU laws will be incorporated into English law and then the government will look at which ones need to be changed. Interchange fees aren’t going to be a priority as there are many other issues they will need to look at, so I anticipate things staying much as they are for several years at least.”

Business and the economy

There are still some concerns about the health of the economy, which is why the Bank of England decided not to increase interest rates this time.

Brian Johnson, Insolvency Partner with the accountant HW Fisher, said that the economy had been affected by concerns over Brexit, and would continue to do so while the uncertainty remained.

“Immediately after the Referendum there was doom and gloom, and then the stockmarket recovered and the pound came down which made exports cheaper and interest rates stayed low,” he said. “That was a false dawn, with people saying that Brexit was not a problem.”

Behind the scenes, businesses were delaying decisions on investment and recruitment until the negotiations were concluded, he said, and there would be more insolvencies among businesses. This was not necessarily a bad thing, as poorly-run companies would be taken over by more efficient managers.

Now read: How to find the best current account

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Last updated: 28 January, 2019

When should I remortgage?

Remortgaging is when you get a new mortgage on your current home. It’s a very important decision that could impact your finances by thousands of pounds every year.

Why should I remortgage?

Before you look at the when, you need to first consider the why. Why should you remortgage if you can afford the monthly repayments, are happy with your lender and are not planning to move house?

We go into this in detail in our Should I remortgage? guide, but in brief:

1. Your current deal is about to end/has already ended (which most likely means you’ll be on your lender’s costly standard variable rate, known as SVR)
2. You want to save money
3. You want to release some of the equity in your home to make changes to it, like renovations or an extension
4. You want to pay off your mortgage earlier
5. The value of your property has gone up significantly
6. You want to switch from an interest-only to a repayment mortgage
7. Economic uncertainty

When should I remortgage?

In general, you should start looking for a new mortgage around three months before the end of your current mortgage’s promotional deal. For example, if you have a three-year fixed rate mortgage, you should start shopping around when you’re 33 months into the 36-month promotional period.

When a lender offers you a mortgage, you usually have between three and six months to accept it – after that, you’ll have to reapply. That’s why you should start looking for a new mortgage when your current mortgage deal has around three months to go.

If you don’t find a new deal, you’ll automatically revert onto your lender’s SVR when your promotional period ends, which is often far more expensive than if you’d shopped around for a new fixed rate or discount rate mortgage. In fact, mortgage broker London & Country recently discovered that a third of mortgage customers are on their lender’s SVR.

According to financial data site Moneyfacts, the average two-year fixed rate mortgage in the UK is around 2.52% compared to the average SVR which is 4.9%. Using these figures as examples, if you had a £300,000 repayment mortgage over a 25 year term, your monthly payments would go from £1,349 to £1,736 – that’s an increase of almost £400 each month, or £4,800 per year.

Of course, with Brexit looming the economy is currently somewhat unpredictable, so it could be beneficial to see what mortgage deals are out there even if yours isn’t coming to an end. But don’t forget to look at all the costs because early repayment charges (to leave your mortgage before it ends) and set-up or arrangement fees (payable when you’re setting up a new mortgage) could cancel out the financial benefit of getting a new, low fixed-rate offer.

This need for security is made clear by the fact there has recently been an increase in popularity for longer-term fixes, like five and 10 years as opposed to just two or three. Plus, the similarity between the two-year (2.52%) and five-year (2.93%) rates shows how lenders are reacting to this shift from borrowers and how hard they are trying to remain competitive.

Mortgage analytics specialist at Moneyfacts, Darren Cook, says: “We have seen the margin between the average two-year fixed and five-year fixed rates narrow as competition gathers pace in the five-year fixed rate landscape. Historically, competition on rates has been strong in the two-year fixed rate market and it seems that rates in this sector have been cut to a bare minimum and the five-year fixed rate sector is the next option for mortgage providers to compete in, causing rates to fall.”

Fixing your mortgage for longer not only means you have prolonged certainty when it comes to your payments, but it also means you will not need to think about changing your mortgage for longer periods of time. However, if you’re unsure whether or not you’ll remain in your current property for the length of the new mortgage deal, make sure it has the added bonus of being portable, which means you can take it from one property to another without (or with minimal) fees.

How to get the best remortgage deals

When it comes to remortgaging, your loan to value (LTV) is primarily based on the amount of equity in your home – plus, if you have some savings put aside, you can put those into the new mortgage deal as well.

Much in the same way that a larger deposit gives you access to better mortgage rates on your first home, more equity equates to lower interest rates. If you have a repayment mortgage, and the value of your home has stayed the same or gone up, you should have a decent chunk of equity in your home.

For example: you originally bought a £200,000 property with a £20,000 deposit – i.e. you borrowed £180,000 at an LTV of 90%. Since then, your property has increased in value to £250,000. You’ve also paid off £10,000 of your mortgage debt through your monthly repayments, so you only owe the lender £170,000. This means your total equity in your home is now £80,000: £20,000 from the deposit, plus £10,000 in debt repayments, and a final £50,000 from the increase in property value.

With £80,000 in equity on a £250,000 home, and only £170,000 left to repay, you’re in a very strong position for remortgaging. You will have an LTV of 68%, which will give you access to some of the best mortgage rates. If you contributed another £7,500 – from a savings account, perhaps – then your LTV would move down to 65%, where you likely get an even better mortgage rate!

Why can’t I remortgage?

If the value of your property has dipped below your outstanding mortgage debt, you’ll have what’s known as negative equity. For instance: In 2017, you bought a house for £300,000 with a £270,000 mortgage on a two-year fixed-rate deal. The deal is coming to an end, but the property has decreased in value to £250,000.

Most lenders will not allow you change mortgages while you’re in negative equity, so you could end up paying its costly SVR until the property goes up in value.

One way to partially remedy this in the interim is to overpay your mortgage, that is, make payments over the monthly requirements. Generally speaking, this should be doable if you’re already on the lender’s SVR (higher rates usually mean greater flexibility) – but if you’re in negative equity whilst on a fixed-rate deal, you must check the terms and conditions before you overpay. Although most fixed-rate deals allow you to overpay by 10% per year, they’ll charge you a penalty for anything over that.

Try to remortgage to a cheaper deal as soon as you’re out of negative equity.

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Last updated: 28 April, 2019

How Much Can I Borrow? Mortgage Affordability Calculator

Use our how much can I borrow calculator to work out how much you can borrow in the UK as a first time buyer, moving home or remortgager, even with no deposit or bad credit. Explore our guide to learn how much you can afford based on your financial situation. Plus, understand how lenders assess your affordability and decide how much you can borrow in the UK.

How much mortgage can I get?

How much you can borrow for a mortgage in the UK is generally a maximum of 5 times your income - or 5 times your joint income, if you're applying for a mortgage with someone else.

Use the how much can I borrow mortgage affordability calculator above for an estimation on how big a mortgage you can get in the UK.

Mortgage lenders always conduct affordability checks before loaning you any money to ensure you can meet the monthly repayments. Since the 2008 financial crash, mortgage lenders are far more strict about who they lend to. They judge your affordability based on an in depth discovery of your income, all your outgoings and your total debt. They also scrutinise your credit file.

Lenders also want to know you could afford the repayments should the interest rates increase by 4% above the Bank of England base rate. This is known as stress testing.

You may only be able to get the maximum amount if you already have a current account with the lender, or you have a very large deposit.

To get a more accurate maximum mortgage figure, apply for an agreement in principle (AIP). An AIP is not the same as a formal mortgage offer. It is a theoretical figure of what a lender may be willing to lend you.

Most estate agents will not take an offer seriously without an AIP. You can secure one quickly online or via a mortgage broker.

How much mortgage can I afford?

How much mortgage you can borrow and how much mortgage you can afford are slightly different. Before you borrow the maximum amount, you should think about whether you can afford the monthly repayments on a large mortgage.

A general rule of thumb is that you don't want to spend more than 30% of your take home salary on mortgage repayments. Any more than that and you risk being "house poor" - where you own a house, but lack the money to do other important things (like build up your savings, go on holiday, etc.)

In London, where house prices are very high, it can be hard to keep your repayments under 30% of your income.

Before getting a mortgage, you really should do the maths on what the total cost of home ownership. If your mortgage payments and household bills look like they will take up 40 or 50% of your income, you should consider getting a smaller mortgage.

How much mortgage can I get with bad credit?

If you have bad credit you may still be able to get a mortgage, but it will be harder to find a lender willing to give you a loan.

You will likely need a larger deposit if you have a history of bad credit, and the best mortgage rates won't be available to you.

Generally the best way to find a bad credit mortgage is to talk to a mortgage broker.

How much deposit do I need to get a mortgage?

In most cases, you will need a minimum of a 5% deposit to secure a mortgage, meaning you’ll need a 95% mortgage loan. The size of the loan versus the property value is referred to as loan-to-value ratio, or LTV.

If you are able to save more, for instance a 10, 15 or 20% deposit, you’ll increase your chances of being accepted for cheaper mortgage products. Lower interest rates (and small set-up fees) equal cheaper mortgages.

The cheapest mortgages are generally only available if you have a big deposit, or – if you’re remortgaging or moving house – a large amount of equity in your property.

How much can I borrow with no deposit?

If you have no deposit - otherwise known as 100% LTV - you can still get a mortgage, but your options will be much more limited than if you had a deposit of 5, 10 or 15%.

No-deposit mortgages generally have a much higher interest rate, which means you'll pay a lot more in interest over the long term.

While 100% LTV mortgages are available for first-time buyers, you can find better and cheaper products if you can save up a deposit of at least 10%.

How do lenders assess my affordability?

Most AIPs only require a soft search on your credit file, which means other lenders will not see it. A real mortgage application will leave a mark on your file that all other lenders will be able to see. Generally, having more marks can count against you because it could suggest you are desperate for credit. Being turned down for a loan product will have a negative impact on your credit file.

Mortgage lenders will review your credit file in depth to make absolutely sure you could afford the monthly repayments of the mortgage you’ve applied for. Each lender has their own scoring system – it does not see the score you do, that’s just for you – and may check one or more of your credit files (from Experian, Equifax or TransUnion), so it is vital you check all three before you apply for a mortgage.

Lenders want to know how stable an investment you are by looking at how long you’ve been in a job, lived at your current address and had a bank account.

Income vs. outgoings

On application, mortgage lenders will look at your salary, guaranteed bonuses, pension, investments and any other income you have. You’ll need to prove your income with payslips and bank statements. If you are self-employed, there are some additional hoops to jump through (see below for more details).

Lenders will also closely examine your outgoings. More than just your rent (or current mortgage repayments if you’re remortgaging), which is likely your biggest monthly expense, they’ll look at other regular bills (credit cards, mobile phone, broadband, utilities) as well as your living expenses.

If you are down to £0 the day before pay day, or worse still, you’re in your overdraft, and your bank statements show you eat at restaurants four times a week, you could find it very hard to get a mortgage as it will look like you cannot manage your money.

For that reason, it’s worth trying to get your finances in order at least six months before you apply for a mortgage.

“Stress testing”

You might be able to afford the monthly payments if you secure a mortgage with a low interest rate, but what would happen if rates increased to 3% above the lender’s standard variable rate (SVR)? The average SVR today is 5.11% – so you would be stress-tested on an interest rate of around 8%. This is known as “stress testing”.

Could you afford the repayments should your personal circumstances change? That is not just what a lender considers, but something you will need to ask yourself too.

Having enough savings to cover three months of mortgage payments could really be worth your while in case your circumstances change – for instance, if you lose your current job.

Lenders may limit the amount you can borrow based on their findings.

Should I borrow the maximum amount?

It can be tempting to borrow your maximum mortgage amount and buy the most expensive property you can afford – but that may not be the right thing to do as it leaves you little wiggle room if rates go up or your income goes down…or both!

To begin with, one of the easiest ways to lower your monthly repayments is to borrow less money, giving you a lower LTV. If you have £20,000 as a deposit, that’s only 5% of a £400,000 property, but 10% of a cheaper £200,000 property.

The other thing to consider is that mortgage products are usually arranged in a tiered fashion, with a lower interest rate offered every time your LTV goes down by 5%. So, 95% LTV mortgages generally have higher interest rates than 90% LTV mortgages, which have higher rates than 85% LTV mortgages and so on.

If you’re looking at buying a property and your LTV would be 87%, you might consider raising a slightly larger deposit to push yourself over the 85% LTV threshold, otherwise you’d be stuck at 90%. Likewise, it might be worth looking at a slightly cheaper property, where the same size deposit would provide a better LTV and allow you to keep some money aside.

Borrowing the maximum amount possible could leave you “house poor” – where you own a house, but you have no funds left to pay for everyday stuff without going into debt.

How can I drop my LTV band if I’m remortgaging?

If you’re remortgaging your home, the exact same rule of thumb applies – you want to aim for the lowest LTV possible – but instead of raising a big deposit you get to use the equity in your home.

For example: you raised a deposit of £40,000 and borrowed £360,000 to buy a home valued at £400,000 (an LTV of 90%). Now the five-year fixed-rate deal deal has ended, you want to remortgage to a new fixed-rate mortgage. You’ve since paid off £40,000 from the principal debt – so you owe the lender £320,000 – and your home has gone up in value to £420,000.

Assuming you want to get a new mortgage for the same amount – £320,000, with £100,000 in equity – you would have an LTV of just 76%.

However, a 76% LTV mortgage will most likely have the same rates as an 80% LTV mortgage. To drop to a 75% LTV (and therefore lower the interest rates) you would need to add £5,000. Alternatively, you could try and get a slightly higher valuation for your home, which would help you drop to a 75% LTV.

If you’re remortgaging to unlock money for home improvements or other expenses, try to keep your LTV tier in mind. If you can stay within a lower LTV tier, perhaps by borrowing slightly less, you’ll save a lot more in interest repayments in the long-term.

How much mortgage can I get if I’m self-employed?

First things first, you can still get a mortgage if you are self-employed, you’ll just have a few more hoops to jump through than if you were a full-time employee.

Lenders will consider you more of a risk, so you will need to gather together at least two complete tax-years of business accounts and tax returns. Some lenders require that the documentation has been signed by a chartered accountant to prove that the information you’ve provided is reliable.

Your maximum mortgage will then be based on your net profit, not total turnover. The exact calculation will vary from lender to lender, and also on your legal status – self-employed is different from the sole director of a limited company, for example.

Some lenders may base your maximum mortgage on your past trading history, while others might want projections of future customers and income. Organise both, just in case.

If you’re self-employed, speaking to a mortgage broker is pretty much a must. They will know which lenders will most likely accept you, therefore cut the chance of a credit score-damaging rejection.

Edited by: Sarah Guershon. Mortgage calculator updated to version 1.11 on July 25, 2019.

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Last updated: 2 August, 2019

Post-Fed rate cut: Here’s how credit cards are affected

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The Federal Reserve has announced its plan to cut rates, meaning cardholders across the country might experience slightly lower interest rates from their credit card issuers.

At the July 2019 Federal Open Market Committee (FOMC) meeting, the Fed voted to cut interest rates by 25 basis points — a relatively small decrease — with the intention of slightly boosting the economy in case of economic downturn.

Fed Chairman Jerome Powell has been hinting at a rate cut for the past few months. With risks to the economic outlook arising, the Fed hopes the cut will preemptively reinvigorate the economy.

The meeting in summary

“[The cut] is intended to ensure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric 2 percent objective,” Powell said at the July 31 meeting.

The chairman also clarified his previous statements, confirming that the boost would not mean a series of further cuts.

“We’re thinking of it essentially as a mid-cycle adjustment to policy,” said Powell. “I’m contrasting it there with the beginning…of a lengthy cutting cycle. That’s not what we’re seeing now. That’s not our perspective now, or outlook.”

What this means for credit cards

The federal funds rate, determined by the Federal Reserve, typically affects the prime rate — or the interest rate banks charge customers with the highest credit ratings. This chain reaction, in turn, continues as the primate rate affects credit card interest rates.

As long as you’re paying your balance in full every month, you likely won’t see an impact from the increase or decrease of rates. But if you have credit card debt or are planning a large purchase in the coming weeks, the lowering of rates can make paying off debt a tad cheaper.

“While credit cards are affected directly by the prime rate, most consumers will feel a minimal impact with this cut,” says Mike Kinane, head of U.S. Bankcards at TD Bank. “We’ve had nine consecutive rate increases since 2008, so one .25 percent decrease won’t result in a dramatic change to a customer’s monthly credit card bill.”

Pay off debt now, not later

With the Fed rate cut, now is the time to pay off your credit card debt. Consider balance transfer card options that can help you consolidate and pay off your debt within an introductory zero percent APR window.

For example, the no annual fee Capital One® SavorOne℠ Cash Rewards Credit Card offers an introductory zero percent APR for 15 months on purchases and balance transfers (16.24% – 26.24% variable APR thereafter). You can transfer your debt to the SavorOne — for a 3 percent balance transfer fee — and pay it off over the course of 15 months while not owing anything in interest.

After your debt is paid off, you’ll still find value in the card’s unlimited 3 percent cash back on dining and entertainment, 2 percent at grocery stores and 1 percent on all other purchases.

The bottom line

The Fed’s rate cut may only marginally impact your cards’ interest rates, but it’s still a good idea to jumpstart your debt payoff as soon as possible.

Learn more about how to start budgeting, paying off your debts and choosing the right cards for your lifestyle here.

How To Use Home Equity To Consolidate Your Debt

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If you feel like you’re struggling with debt, you’re not alone.

The average amount of non-mortgage household debt in the U.S. reached $24,706 in 2017, according to Experian’s State of Credit Report. The good news is that home equity interest rates are still near historic lows. Assuming you have enough equity in your home, this avenue of debt consolidation could be a better and cheaper alternative to carrying high-interest debt.

“It’s generally a good option to pay down credit card debts or personal loans, assuming it’s done responsibly,” says Andrew Weinberg, principal at Silver Fin Capital Mortgage in Great Neck, New York. “It can save a lot of money.”

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Get Started

There are two ways to access home equity – a home equity loan or a home equity line of credit, or HELOC. A home equity loan offers a one-time lump sum payment of funds taken as a second mortgage on your home. A home equity line of credit is a revolving line of credit that enables you to withdraw money over time as you need it and pay back the loan as you can.

Your home’s equity is its current value minus the loan balance you still owe. Tapping too much of your equity is risky, and you could wind up underwater in your mortgage if market conditions turn. This means you might owe more on the house than it’s worth, making it difficult for you to move without putting up cash to make up the difference.

“The value of a house goes up and can go down. As a general rule, I would never recommend anyone borrow more than 80 percent of their home’s value,” says Mike Zovistoski, managing director at UHY Advisors.

Pros of using home equity to consolidate debt

Whether you use a home equity loan or HELOC, tapping your home equity to consolidate debt can offer several advantages:

1. You’ll have just one payment

If you’re juggling car loans, a personal loan, medical bills and credit card debt, you already know how challenging it can be to keep track of due dates. By consolidating your debt, you may be able to combine it all to one single payment per month, simplifying your bills and reducing the chance of missed payments.

2. You’ll know when your debt will be paid off

Assuming you don’t keep using your cards, using a home equity loan or HELOC to consolidate debt streamlines the process of paying those accounts off. With a home equity loan product, you’ll have set repayment terms and know the exact date when the loan will be repaid.

3. You can get a lower interest rate

Because the debt is secured against your property, home equity loans and HELOCs have significantly lower interest rates than credit cards. The average variable credit card interest rate was 17.87 percent as of late April, according to Bankrate data. Meanwhile, the average rate of a home equity loan was 5.9 percent and 6.75 percent on a $30,000 HELOC.

A home equity loan also enables you to lock in an interest rate, unlike a credit card that can increase at any time. Additionally, with a home equity loan, more of your monthly payment goes toward the principal rather than the interest.

“It’s almost always going to be a better deal than the rates you’ll pay on credit cards,” Weinberg says of home equity products.

4. You can save money

The ability to lock in a lower rate not only saves money in the long term, but can also equate to a lower monthly payment and help you pay down the debt faster.

For example, if you had $10,000 in credit card debt at a 16 percent interest rate, you’d pay $243 per month and more than $4,591 in interest by the time you pay it off. Consolidating that debt with a five-year home equity loan would not only allow you to pay off the debt faster, but also reduce your monthly payments to $193 and save $3,391 in interest.

“If the borrower is able to continue making the same monthly payment amounts that were originally scheduled on the high-cost debt, they would be able to repay the debt over a shorter period of time and save money,” Zovistoski says.

Use a home equity debt consolidation calculator to find out how much you could save.

Cons of using home equity to consolidate debt

While a home equity loan or HELOC can be a good way to consolidate and better manage debt, it comes with several risks and downsides:

1. It takes time

Unlike opening a credit card or filling out an application for a personal loan, applying for a home equity loan or HELOC is a more in-depth process. The bank will typically want an appraisal of your home along with two years of tax returns, W-2s and bank statements. It can typically take up to 30 days or more to close on a home equity loan or HELOC and get access to the money.

2. Your house is the collateral

HELOCs and home equity loans are forms of secured debt that use your home as collateral. This enables lenders to offer much lower interest rates and more favorable terms than credit card companies, but it presents a greater risk: losing your home if you fail to repay the loan.

While credit card companies and personal lenders can’t come after your home, a bank could foreclose on your home if you default on a HELOC or home equity loan. In other words, don’t take out a HELOC or home equity loan unless you can comfortably afford the payments, in addition to your normal monthly mortgage payment, Zovistoski says.

3. Lender fees and closing costs

Depending on the lender you choose, you’ll likely face some charges such as closing costs and appraisal fees, all of which can add to the cost of the loan. When shopping for a lender, make sure you understand the closing costs that each lender charges and how it will affect overall borrowing costs. Some may claim to offer no fees, then add them back in later as penalties if you close the account before the term ends, Weinberg says.

4. You may fall back into debt

One of the greatest risks is that you may use home equity to pay off your credit card debts only to run those same cards up again. People who have a history of debt problems can be susceptible to falling into the hole again. It’s not an uncommon scenario, Weinberg says.

“They may come back in a couple of years and be back where they were with more credit card debt,” Weinberg says. “You can only do it so many times before you run out of equity.”

5. Tax deductibility is restricted

Under previous tax laws you could deduct the interest you paid on a home equity loan or HELOC, regardless of its use. The new tax law now restricts the mortgage interest deduction on home equity loans or HELOCs to use the money to buy, build or renovate the home you’re borrowing against. Even so, the significant savings in interest rates on home equity products compared to credit card rates still make home equity borrowing a worthwhile option.

Other alternatives for consolidating debt

Tapping home equity may not be the best option for people with serious debt and credit problems. If that’s the case, or if you don’t have enough equity in your home, debt relief programs may be a better option.

One avenue is to work with a certified, non-profit credit counseling agency on a debt management plan. It won’t hurt your credit score but will require you to close all your accounts included in the plan. You’ll have to make monthly payments to the agency which in turn then makes the payments to your creditors. If you have debts with multiple credit cards or lenders, you’ll be saved the hassle of tracking multiple bills and due dates.

Another option is a debt settlement plan. While you’ll be able to reduce the balance by agreeing to settle with one or more creditors for less than what you owe, your credit score will suffer significantly. You’ll also have to pay fees and income taxes on the amount forgiven, a consideration that could make debt management less attractive.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Get Started

Bottom line

It’s a smart idea to shop around with several different home equity lenders to ensure you get the best rates and terms. Having a plan for how you’ll attack high-interest debt — and how you’ll repay your home equity loan or HELOC — can set up your finances for a more secure future.

Shop for a home equity loan or HELOC from Bankrate lending partners

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Auto Loan Refinancing - When to Refinance Your Car Loan

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When you’ve gone through the effort of getting a car loan, it can be tempting to simply pay it off and never look back. Before you engage the cruise control, though, consider the potential benefits of a refinancing an auto loan.

People typically refinance an auto loan because they’ve found a better interest rate, which would result in them saving money. But there are other situations when refinancing would make sense. The key is keeping an eye out for any of the five following situations and being prepared to act.

• Situation 1: You see interest rates dropping. Interest rates on all sorts of consumer loans periodically rise or fall, influenced largely by the monetary policies of the Federal Reserve. The Fed has raised interest rates three times in 2018, but history shows that reductions will eventually come around. When they do, be ready to look for your opening.
• Situation 2: You want to improve on a “dealer-sourced” loan. If you financed your car through the dealership, you likely got a higher interest rate than you could have thanks to something called a dealer markup. A dealer’s preferred lenders commonly charge higher rates, and part of difference goes back to the dealership. Compare your current loan with offers from other sources (your bank or credit union, an online lender, etc.) to see if you can get a lower interest rate with a refinance car loan.
• Situation 3: Your credit score has improved. All those months of diligently paying off your current loan can have a positive effect on your overall creditworthiness. Lenders typically see a good credit score as a sign of a less risky borrower, which in turn can lead to offering better interest rates. If your credit score has improved since you took out the loan, you might be able to save money on interest through a refinance. You can check your credit for free on Bankrate.
• Situation 4: You want to buy the car you’re currently leasing. Car leases typically include an option to buy at the end of the lease. You can get a refinance loan to buy the car outright when your lease expires, although this approach has its pros and cons. If you want to save money on a lease-to-purchase, you’ll need to make sure that the total cost of buying the car, including interest on your refinance auto loan, would be lower than extending the lease or leasing a different car.
• Situation 5. You need lower monthly payments. Sometimes refinancing a car loan is a life preserver, not a windfall. If you run into financial trouble and want to reduce your car payment, you could refinance a loan with a longer term (from 36 months to 48 months, for instance). Although you would pay less per month, expect to pay more total over the life of the longer loan.

How to track refinance interest rates

Most refinance opportunities involve taking advantage of a better interest rate. If you find an interest rate substantially lower than what you’re paying on your original loan, it could be time to get a new deal with a refinance car loan.

One easy way to keep an eye on interest rates is by checking the Bankrate auto loan lender marketplace, which includes current offers on refinance car loans.

Also, Bankrate’s Auto Refinance Calculator lets you compare your current loan with a new offer side-by-side. Just enter a few pieces of information, including your current monthly payment and the balance you owe, to see how much you could save by refinancing.

When is refinancing a bad idea?

In some cases, refinancing may not make good financial sense for either you or the potential lender. Those situations include:

• When you’re well into paying off your current loan. Through the amortization process, your interest charges gradually decrease over the life of the loan. As a result, a refinance has more potential to save money when you’re in the earlier stages of repaying the original loan.
• When you’re trying to refinance an older or high-mileage car. Most lenders won’t find it worthwhile to issue a loan on a car that has significantly depreciated in value.
• If you’re “upside-down” on the original loan. Lenders typically avoid refinancing if the borrower owes more than the car’s value (also known as being underwater).

Let smart shopping drive the decision to refinance

If you’re wondering how to refinance a car, the process isn’t that different from buying the car itself. You’ll want to shop around for a good deal and take a couple of test-drives (in this case, with the Auto Refinance Calculator).

If everything falls into place, you could be looking at a more financially comfortable ride.

Which Type Of CD Is Best For You?

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The traditional certificate of deposit account remains the most popular type of CD. However, it’s far from the only option. Financial institutions offer a variety of non-traditional CD products. These specialized CDs can: give savers more flexibility to benefit from rising rates, provide early access to their funds or offer better-than-average rates of return. If you’re willing to sacrifice some yield or tolerate some additional risk, you might find a CD better suited to meet your financial needs.

But first, what is a CD account?

A certificate of deposit is a time deposit account. A bank agrees to pay interest at a certain rate if savers deposit their cash for a set term, or period of time.

11 types of CD accounts

1. Traditional CD

With a traditional CD, you deposit a fixed amount of money for a specific term and receive a fixed interest rate. You have the option of cashing out at the end of the term or rolling over the CD for another term. Most institutions don’t allow you to add additional funds before your traditional CD matures.

Penalties for early withdrawal can be quite stiff and will cause you to lose interest, and possibly principal. Federal regulation — Regulation D, specifically — sets only the minimum early withdrawal penalty for traditional CDs. There is no law preventing an institution from enacting tougher penalties, but the institution must disclose those fees when the account is opened.

Before you pick a CD, it’s important to calculate how much interest you could earn by the end of your term.

2. Bump-up CD

A bump-up CD helps you benefit from a rising-rate environment. Suppose you buy a two-year CD at a given rate, and six months into the term the bank offers an additional quarter-point on the same investment.

A bump-up CD gives you the option of telling the bank you want to get the higher rate for the remainder of the term. Institutions that offer this CD option usually allow only one bump-up per term.

The drawback is you may get a lower initial rate on a bump-up CD than on a traditional CD. The longer it takes interest rates to rise, the longer it will take to make up for the earlier, lower-rate portion of the term.

Be sure you have realistic expectations about the interest-rate environment before buying a bump-up CD. See how bump-up CD deals stack up against traditional CD rates.

3. Step-up CDs

In a rising-rate environment, you might also want to consider a financial institution that offers a step-up CD.

It’s not uncommon to see a step-up CD and a bump-up CD lumped together. Both of them will help you move up into a higher yield. However, they are different products. Rather than requiring you to ask the bank for a higher rate as bump-up CDs do, step-up CDs will automatically increase their rates throughout their terms at certain intervals.

They are not too common, however. Moreover, there is a big caveat: There is no guarantee that you would end up better off than you would have if you had parked your money in a traditional CD. The blended APY could be less than you would make with a traditional CD. As such, you’ll want to evaluate the starting APY as well as how much the rate is increasing before making a decision.

4. Liquid CD

Liquid CDs, or no-penalty CDs, offer investors the opportunity to withdraw their money without incurring a penalty. However, these types of CDs may come with strict withdrawal limits and large minimum investment requirements.

You can generally expect the interest rate on a liquid CD to be higher than that of a savings or money market deposit. But it’s usually lower than the rate on a traditional CD of the same term. You’ll have to weigh the convenience of liquidity against whatever return you’re sacrificing.

A key consideration when purchasing a liquid CD is how soon you can make a withdrawal after opening the account. Most banks require that the money stay in the account for at least seven days before it can be withdrawn without penalty, but banks can set the first penalty-free withdrawal for any time period. It’s important to read the fine print before picking up a liquid CD.

5. Zero-coupon CD

These CDs are similar to zero-coupon bonds. As with the bond, you buy the CD at a deep discount to its par value (or the amount you’ll receive when the CD matures).

“Coupon” refers to a periodic interest payment. “Zero-coupon” means there are no interest payments.

So, you might buy a 12-year, $100,000 CD for $50,000, and you wouldn’t receive any interest payments over the course of the term. You’d receive the $100,000 face value when the CD matures.

One drawback is that zero-coupon CDs are usually long-term investments, and you take on considerable interest-rate risk. If interest rates rise during the 10-year term in question, you’ll be on the losing end of that deal.

Another potential problem is that you’re credited with phantom income each year. No money is being put in your pocket, but you’ll have to pay Uncle Sam on the earnings being accrued.

In our example, you’d earn $3,000 during the first year and would owe tax on the money, though you haven’t actually received it. Each year, you’ll have a higher base than the year before — and a bigger tax bill. Make sure you have room in your budget to cover the taxes.

6. Callable CD

With a callable CD, you could get a higher yield than with traditional CDs but with a risk: the bank that issues the CD can “call” it away from you after your call-protection period expires, and before the CD matures. For instance, if you buy a five-year CD with a six-month call-protection period, the institution could call it back after the first six months.

Just as with the zero-coupon CD, the bank is shifting interest-rate risk on to your shoulders. If it issues a five-year CD at 3 percent and six months later rates drop by a full percent, the bank will drop its rate as well. It’ll now be paying 2 percent on the five-year CD you originally got at 3 percent.

The bank can call, or take back, your CD and reissue it at the lower 2 percent. You’ll receive your full principal and interest earned. But you’re stuck reinvesting your money at lower rates.

Usually, banks pay a premium for you taking on the risk that the CD may be called. They may pay investors a quarter- or half-percent more on a callable CD than they would on a CD without the call feature.

7. Brokered CD

A brokered CD is simply a certificate of deposit sold through a brokerage firm. To qualify for one, you’ll need a brokerage account. Some banks use brokers as sales representatives to find investors willing to purchase the banks’ CDs.

Buying CDs through a brokerage can be convenient. There’s no need to open accounts at a variety of banks just to get the best CD yields. Brokered CDs may pay higher rates than CDs from your local bank because banks using brokered CDs compete in a national marketplace. But that’s not always the case.

Brokered CDs are more liquid than bank CDs because they can be traded like bonds on the secondary market. But there is no guarantee you won’t take a loss. The only way to guarantee getting your full principal and interest is to hold the CD until maturity.

Don’t assume all brokered CDs are backed by the Federal Deposit Insurance Corp. It’s up to you to do your due diligence and look for that FDIC seal on the broker’s website. You should also watch out for brokered CDs that have call options. And before you invest, check on fees and early withdrawal policies.

8. High-yield CD

Banks compete for deposits by offering better-than-average rates. High-yield CD accounts may offer two or three times the national average on a given term. These are generally traditional CD accounts that pay very generous returns. Bankrate offers the best route for finding the highest rates in the nation.

Bankrate surveys local and national institutions to find banks offering the highest yields on CDs. All accounts are directly offered to the consumer by the institution.

Take time to compare the best CD rates. Then calculate your potential earnings.

9. Jumbo CD

Just as its name implies, a jumbo CD requires a larger deposit than a traditional CD. To get one, you would typically need to make a minimum deposit of $100,000. In some instances, that deposit threshold will be somewhat lower.

While jumbo CDs could pay more than a traditional CD, they might not. A five-year jumbo CD on average pays 1.55 percent APY, while a 5-year CD rate pays 1.49 percent as of late January, according to Bankrate’s national survey of banks and thrifts.

In putting tens of thousands of dollars into a jumbo CD, there’s a risk of whether the account will keep up with the inflation rate. Also don’t forget to consider your tax bite: The interest you earn will be taxed as ordinary income.

10. IRA CD

Individual retirement accounts hold investments. IRA CDs are IRAs where you invest in CDs.

IRA CDs may appeal to the risk-averse who are preparing to pad their retirement savings with guaranteed returns – you’ll know how much you’ll make over the product’s term so long as you keep the CD until its maturity. You will also have protection of up to $250,000 from the government if you purchase IRA CDs from an FDIC-insured institution. Translation: If the bank goes bust, your money won’t.

The trade-off is that you won’t make high returns on these investments. While they can help you diversify your portfolio, IRA CDs are not generally viewed as smart retirement strategies for younger investors, who can take on more risk.

Just like with the other CD types, make sure you shop around for the best yields. To effectively use an IRA CD, fund one with money you won’t need until age 59 1/2, so you don’t have to pay a tax on early distributions.

11. Add-on CD

Most CDs let you make only an initial deposit. But add-on CDs let you make multiple deposits into the account during the CD’s term. However, how many deposits you can make into an add-on CDs varies. So, make sure you read the fine print.

These accounts are worth considering if you are saving for a goal.

Make sure you look around to find the best rates. And reminder, try not to lock up your money for too long at times when interest rates are expected to increase.