Over the years, the definition of a low interest rate has become a confusing list of financial terms and decisions that many average individuals cannot understand. Determining whether an interest rate is truly low or if it is just a product of a savvy financial industry is becoming more difficult every year, demonstrated by the thousands of individuals now finding that they were not as financially literate as they believed they were and are now facing financial difficulty or financial devastation because of their bad decisions. It is very important that individuals understand some basic financial advice so that they will not be taken advantage of by unscrupulous lenders.

If you’re like the majority of your officemates, you probably don’t really know what it means when “the Fed drops a quarter”, you just know it’s good news and that you are happy about it. But what does this mean to you, your mortgage and your budget?

When the Fed, or Federal Reserve, drops a quarter, that means that the Chairman of the Federal Reserve has lowered interest rates one-quarter of one percent, or 0.25%. This is important because the Federal Reserve is the central bank of the United States. Its purpose is to stabilize the country’s monetary system. One of the ways it does this is by raising and lowering certain interest rates in the best overall interest of the economy. For example, if inflation is getting out of control, the interest rates will be increased to control that. If the economy is beginning to slump, the Fed will lower interest rates in order to increase consumer spending, which helps the economy to grow.

In the case of mortgages, if you have an Adjustable Rate Mortgage, the Fed lowering interest rates can mean a lot. By refinancing to a mortgage with a lower, fixed rate, your monthly mortgage payments can be significantly reduced, sometimes by thousands of dollars a month. The greatest benefit of moving from an adjustable rate to a fixed rate, however, is not having to worry about your payments increasing due to interest rate fluctuations. A fixed rate will make your mortgage payments stable for the life of the loan.

If you already have a fixed rate mortgage and current interest rates for a fixed rate are two full percentage points lower than your current mortgage, you can also benefit by refinancing your mortgage to the new rate.

Refinancing your home to receive an interest rate that is lower than what you are currently paying may seem like an attractive option, but only if you can avoid the numerous fees and penalties that are written into each mortgage agreement to ensure that the financing company does not lose money on the deal. Additional fees will also be levied by the new lender as a payment for underwriting and approving the new mortgage loan terms on a home refinance.

When speaking to a lender about refinancing, get what is called a Good Faith Estimate. This will tell you what the approximate out-of-pocket costs will be if you decide to refinance.

Now that you know a little bit about the impact of the Federal Reserve Bank and how that may affect your mortgage rates, you can sit down and make an informed decision about how refinancing can help you.