Ask Bankrate: Questions about free refinancing, keeping retirement savings safe and more

Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.

Questions:

• Why do banks display APY instead of APR?
• Does free mortgage refinancing exist?
• Should I put retirement savings in a money market account?
• Should I use reverse mortgage money?
• How can I secure a lower home equity rate?

Q1: Why do banks display APY instead of APR?

Why do financial institutions reference annual percentage yields (APY) versus interest rates? I personally rely on what the financial institution is actually paying.

— Richard S.

Answered by Stephen Kates, CFP: “Annual percentage yield (APY) and annual percentage rate (APR) are both correct ways to refer to the interest on a given balance of money but are used for different purposes. In addition, both differ from a flat interest rate.

APY is used to display the interest earned on an interest-bearing product like a CD or a savings account and includes the compounding interest of this product. For example, if you bought a $10,000 CD that has an interest rate of 3 percent and compounds daily, you would earn $304.53 by the end of your first year. This is more than a flat 3 percent, and it is equal to the APY of this CD, which is 3.0453 percent. While this difference is small, it will add up over time.

APR is used to demonstrate the cost of borrowing money and you might see this used for mortgages or credit cards. The difference between APR and the base interest rate is that APR includes the underlying fees for borrowing money. While your mortgage interest rate may be a flat 3 percent, the APR may be 3.125 percent when you incorporate the fees you pay as the borrower.

APR also differs from APY in one very important way. APR does not include compound interest, but your lending institution may incorporate compound interest when calculating how much your payments will be. When comparing products of any kind, be careful to compare APY to APY and APR to APR so you can make a fully informed decision.”

Q2: Does free mortgage refinancing exist?

Is free refinancing available anywhere?

— Kevin S.

Answered by Jeff Ostrowski, senior mortgage reporter: “Unfortunately for borrowers and fortunately for lenders, there’s no such thing as a free refi. That makes sense when you consider the myriad expenses involved in a new loan — an appraisal, title work, a credit check and, in some cases, state taxes. Many lenders market ‘no-closing-cost’ refinances, but that doesn’t mean the refi is free, simply that you’ll pay for the costs over time rather than up front. One potential workaround is a loan modification, where your lender agrees to keep your existing loan and lower your rate. However, that option is available only on a small number of loans, usually those that a lender keeps in its portfolio rather than reselling as part of a mortgage-backed security. By all means, ask your lender if this option is available — but don’t be surprised if the answer is no.”

Q3: Should I put retirement savings in a money market account?

I’m thinking about moving my retirement savings into a money market account just to keep it safe during the COVID-19 pandemic. I’m very concerned about what the comeback is going to be.

— Theresa S.

Answered by James Royal, senior investing reporter: “Moving your money to a high-yield savings account or money market account is not necessarily a bad idea (and see Bankrate’s list of top players for the best yield, if you do.) But you’ll also want to consider your time frame. Do you have 10 years or more until retirement and you need those funds to be growing at that time? If so, at some point you’ll have to make the decision to buy back into the market. Or do you need the money in less than a few years? If so, it can make a lot of sense to make sure that you have the money perfectly safe for when you need it. Experts recommend that you should only invest money that you don’t need in the next three to five years, so that you can ride out the volatility in the market.”

Q4: Should I use reverse mortgage money?

We have a reverse mortgage. The home is paid off, and we have $100,000 savings. The savings is split 50-50 between cash and ETFs. Our combined Social Security is $36,000, which covers our living expenses.

Should I tap all the money available in our reverse mortgage and park it in cash? I’m concerned that when I need it, the money may not be available because of the recession.

— Mark V.

Answered by James Royal, senior investing reporter: “If you tap the cash in your home with a reverse mortgage, be aware that the interest rate you’ll earn in a high-yield savings account is likely to be much less than the interest rate on the reverse mortgage. So you’ll wind up paying (on a net basis) to have access to that cash when you need it. Consider that you’re already in a good position, since you can live on your Social Security benefits, which are a reliable source of income. And with a healthy chunk of cash already saved, you’re ready for an emergency. In addition, for short-term spending in a pinch, you should have access to credit cards, which can tide you over. I see little reason to pay – potentially a lot – for access to cash on the potential fear that the reverse mortgage might not be accessible.”

Q5: How can I secure a lower home equity rate?

Is there any way to make changes to lower my home equity interest rate?

— Lyn S.

Answered by Chelsea Wing, loans editor: “One of the biggest factors lenders consider when determining your interest rate is your credit score. To improve your credit score and secure better rates, focus on making timely payments on your credit cards, lowering your debt-to-income ratio and minimizing the number of new accounts you open.

You’ll also want to pay off as much of your mortgage balance as you can before tapping into your home equity, as lenders often give the most favorable rates to people with a lower loan-to-value ratio (your remaining mortgage balance divided by your home’s value).

If you already have a home equity loan and you’ve made improvements to your credit score since opening the loan, now may be a good time to refinance. Just remember to factor in the lender’s closing costs and fees, as well as the possibility of an extended repayment timeline.”