No one was surprised when the Federal interest rate rose by 75 bps in early November of 2022. It was the sixth consecutive rate hike, with today’s rates being the highest since 2008. This continued upward trajectory has Cambridge Realty Capital Vice President Zach Scardina urging borrowers with existing variable-rate loans to lock in their rates.
A variable-rate loan can be highly advantageous in an economy where interest rates are demonstrating a pattern of remaining subdued, or where rates are likely to drop in the near future and remain relatively low. The major disadvantage of a variable rate loan is, naturally, the inability to project a precise cost over a longer period of time.
Sometimes, though, such a gamble can pay off in a big way for a borrower who is in a position with some wiggle room when it comes to budgeting. “This scenario doesn’t work for all borrowers, but for those for whom it does, it has saved thousands, tens of thousands or more, depending on their terms,” noted Scardina. A prime example: borrowers with variable rates benefited greatly from the recent COVID-19 pandemic, which brought about significant interest rate drops.
However, with hints of continued rate hikes and increases all but guaranteed for the foreseeable future, Scardina is urging borrowers with existing variable rates to lock in sooner rather than later. “This is especially true for borrowers with mortgage loans that have upcoming maturities where borrowers will either need to renew a mortgage loan with their current lender or refinance with another lender.”
Scardina went on, “Given the high rate of inflation the economy has experienced in recent months, fixed-rate loans offer borrowers the ability to control interest costs and not risk having a higher interest expense.”
He pointed out that certain mortgage lenders may not provide fixed-rate loans. “These borrowers may have to consider refinancing with another lender, such as Cambridge.” Existing loans subject to interest rate swaps or defeasance may pay the borrower to refinance elsewhere and achieve their other business goals.
Often the biggest fear borrowers have is the fear of losing money if interest rates take a plunge again in a few years. There’s nothing like a global pandemic to highlight the fact that the unexpected does sometimes occur and can lead to interest rate dives. Fortunately, such extreme events are rare, but losing money is nevertheless a very real cause of concern for borrowers. Even a drop of a fraction can cost borrowers thousands (or more) for those locked in at high rates.
Fortunately, Cambridge provides cost-effective options for its borrowers in the event that rates go down. “Should interest rates decline at some point in the future, Cambridge offers its clients programs to either refinance or modify the current loan so that borrowers can lower their rate should current market conditions offer the opportunity,” noted Scardina.
In fact, Cambridge was able to offer many of its borrowers the option to break out of their existing loan agreements during the COVID-19 pandemic and renegotiate a lower rate. “Cambridge was very proactive during the pandemic and examined all of its loan agreements to see where individual borrowers could benefit,” Scardina pointed out. Many of the borrowers Cambridge reached out to during that time period were unaware that they could get a better interest rate. “We were able to help several of our borrowers save a significant amount of money over the course of their loans.”
The bottom line: there is no need for borrowers to lose sleep over ‘what ifs.’ “Cambridge always has your back when it comes to your loan,” said Scardina.