The Federal Reserve recently lowered its interest rate by 50 basis points or one-half percent. Some of our members have asked us about the efficacy of refinancing existing loans in this new rate environment.
Refinancing is essentially the same process as buying the airplane again but without the involvement of a seller. There are a couple of differences, but it’s not a quick exchange of documents and then you have a new rate. There is normally a cost to refinancing, so you need to evaluate whether the interest rate reduction, plus the cost to refinance, will net you enough savings to be worthwhile.
It’s important to understand that while interest rates may rise quickly, they don’t fall at the same pace. In financing terms, interest rates are “sticky on the downside,” especially in the aircraft world. Auto loan and mortgage interest rates may align more with real time drops, consistent with Fed rate reductions. Aircraft lenders tend to be more reluctant to change their rates, up or down. They often wait and see what the market does and then base their rates on a slightly longer-term cost of funds.
At AOPA Finance, we can talk with you about where interest rates are currently and when we think rate movement may occur, based on our historical knowledge—while taking into account that even AOPA doesn’t have a crystal ball.
As part of the refinancing process, lenders will need an updated application and financial package. They're also going to require new loan documentation to be written, which means those documents need to be generated again for your new loan. In other words, the same paperwork you completed for the purchase will likely need to be repeated, including the use of escrow and the time it takes to process the documentation.
It’s also important to keep in mind that the lender will require a current valuation on the aircraft. Current means less than 30 days old.
If you've just recently financed within the last year and rates have come down half a point, it probably doesn’t make much sense to refinance. You're not going to be able to recoup the costs for years down the road.
If your purpose for refinancing is just for the rate, we normally advise our members that it’s best to wait until rates drop at least a full percentage point. At that point, you will be likely to recoup the closing costs in a timely manner. That’s because, at a full percentage point or more, a larger impact on the monthly payment tends to become evident.
Other scenarios where it could make sense to refinance include a change in ownership structure or a change in ownership entity. An example of the former is when one of the partners on an aircraft suddenly wants out. In that case, most lenders would require refinancing so that the people on the loan and the aircraft registration are the same.
In the latter instance, if you're going to change the ownership structure—for example, from registered individually to registered as an LLC, or as some other sort of entity—lenders would require refinancing.
Great advice. Great rates. Helpful and responsive reps you can trust. Three good reasons to turn to AOPA Aviation Finance when you are buying or refinancing an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (800.627.5263), or click here to request a quote.
