1/23/2012 5:20 PM ET|
7 smart moves while rates are low
There's not much room for interest rates to go lower, and making the right moves now could potentially save you big money.
While go-go lending is partly to blame for the economy's current financial troubles, ironically, borrowing money may help ease the country out of the downturn. At least that's the thinking behind the Federal Reserve's recent pledge to keep low interest rates into 2013.
While this move has not triggered an uptick in consumer confidence, experts agree money probably won't get any cheaper to borrow than it is right now. Average rates for 30-year fixed-rate mortgages, home equity loans and even 60-month new-car loans are hovering around 4.2 percent, 6.6 percent and 5.2 percent, respectively, according to Bankrate's most recent weekly survey of interest rates.
If you have a good-to-excellent credit score and not a lot of debt, you may want to consider ways to take advantage of these historically low interest rates, says Jessica Cecere, regional president for CredAbility, a nonprofit credit counseling and education agency.
"Interest rates are so low that consumers should take advantage of these rates, if they can afford to, to help them save money on planned purchases," Cecere says.
So what are some smart borrowing decisions to make while interest rates are low? Here are a few.
1. Buy a home or rental property
Rates on long-term fixed-rate mortgages are at their lowest in decades. If you have been putting off your decision to buy a house, now may be the "perfect storm" of low interest rates and low home prices.
Since rates are so low, consider getting a 15-year instead of the traditional 30-year mortgage. "The amount you will save in interest payments over the life of the loan is enormous," says Scott Stratton, the author of "Your Last Five Years: Making the Transition from Work to Retirement."
If you already own a home and have some money stashed away for a down payment, now may be a good time to think about buying real estate for passive income, says Greg McFarlane, the author of "Control Your Cash: Making Money Make Sense."
Not only are mortgage rates and property values low, but the rash in foreclosures means more people are in need of shelter. "They're called renters, and they're your cash cows," says McFarlane. Not only will you get regular income from renting property, but as a landlord you can take tax breaks in the form of mortgage interest deductions. (Figure out how much house you can afford with MSN Money's calculator.)
2. Refinance your home
If you want to get out from under an adjustable-rate mortgage -- and you aren't upside down on the loan -- now is a good time to switch to a fixed-rate mortgage. Use an online mortgage calculator to figure how much you'll save with the new rate.
While you're at it, look into refinancing your 30-year mortgage into a 15-year loan so you don't inadvertently add many years of interest payments to your mortgage.
For example, a $225,000 house purchased five years ago with a 30-year loan or mortgage rate of 7% has a monthly payment of around $1,500 a month with about $76,000 worth of interest paid in those five years. If you refinance the balance of that loan now at the current 3.5% interest for 15 years, you'll save almost $175,000 over the life of the loan, plus you'll pay off the home almost 10 years sooner. And your payments will go up only about $25 per month.
"Focusing only on monthly payments is penny-wise and pound-foolish in the long run," says Stratton. "Owning a home outright and having no monthly mortgage payment goes a long way. . . . In 15 years, when the house is paid off, it can literally make the difference between being able to retire or not."
3. Buy a car
If you're in the market for a new car, now may be the time to trade in your clunker. Car loans aren't as rock-bottom as mortgage loans, but manufacturers are offering plenty of incentives, such as special financing options. Still, at press time the average 60-month new-car loan was around 5.3%, according to Bankrate's weekly survey, and some car loans were even cheaper.
"This is where a person with good credit can use that credit as a force multiplier," McFarlane says. "Stretch out your financing dollar for as long a term as possible, especially since inflation can't be postponed forever."
If you are still paying off your current car, you may want to consider refinancing the remaining car loan at lower and more favorable interest rates. (How much car can you afford? Find out with MSN Money's calculator.)
4. Give money away
If you are fortunate enough to have money to give away, low interest rates make it easier to be generous and charitable, says Alexey Bulankov, a financial adviser and CFP with McCarthy Asset Management Inc. of Redwood Shores, Calif.
"This environment of low rates and poor economic conditions, combined with a massive intergenerational wealth transfer and looming estate, gift and income tax hikes create a once-in-a-lifetime opportunity to give, borrow, move money, be charitable and create a legacy," Bulankov says.
Look into strategies such as a charitable lead annuity trust, or CLAT, which combines philanthropic with wealth-shifting goals by allowing the grantor to put money into a trust that pays out to a charity during the life of the grantor. At the end of the grantor's life, the remainder is passed to beneficiaries. CLATs work well in a low-interest-rate environment. If the performance of the investments exceeds the "Section 7520" interest rates -- used to value certain charitable interests in trusts and published monthly by the Internal Revenue Service -- then the excess earnings at the end of the term pass to the beneficiaries tax-free, Bulankov says.
"The lower the 7520 rate, the larger the potential gift to the family or heirs," he says.
5. Review investments
While you don't want to spend money in a down economy on investments that are not giving you much in return, you may want to look into ways you can diversify your portfolio and spread the risk, Cecere says.
Talk to your financial adviser about alternatives to savings accounts and money market funds, asking for options that earn better returns on your savings. Also, be wary of buying investment vehicles such as bonds when interest rates are low.
6. Lock in student loan rates
Federal student loan rates are usually low, but even they have taken a slight dip in this low-interest environment. If you have more than one student loan outstanding, check with your federal student loan provider on how to consolidate and lock in at a lower interest rate, Cecere says. (Use MSN Money's calculator to find out how long it'll take you to pay off your student loans.)
7. Pay off credit card debt
While mortgage and car loans have favorable interest rates, the same is not true for borrowing money on your credit card. Work on reducing or eliminating this debt. If you have a choice of putting money into a savings account or paying off debt, pay off the high-interest credit card debt first because financial institutions are paying very little interest in savings accounts. (How long will it take you to pay off your credit cards? Find out with MSN Money's calculator.)
You also may want to negotiate lower interest rates with credit card companies, particularly if you have a good track record with paying on time, Cecere says.
VIDEO ON MSN MONEY
I will offer a bit of advice, you've heard it before from many sources. DON'T live beyond your means, PAY off your debt, LIVE in the real world. Would I like ti have an iPad 3, a 4g LTE phone, etc, but I do not need them, so I do without.
In Move #2, we are encouraged to switch from a 30 year mortgage to a 15 year mortgage, even though rates are at historic lows.
In Move #3, we are encouraged to "stretch out your financing dollar for as long a term as possible, especially since inflation can't be postponed forever".
Hmm. Did different people write #s 2 and 3?
Today, while giving info over the phone for a refinance through Wells Fargo, at 3.87%, things were going fine, but when the broker went to type in the final info, the rate had leapt up to 4.+%. Apparently, during the phone call the rate went up 3/4 %. Bye, bye Wells F. I have 81% equity in the home and an exellent credit rating. I should be one of those upside down mortage holders who bought more than I could afford, and then the bank would be helping me.
So much for having great credit and making wise decisions. Now I get to bail out all the flakes.
Hell, why not go with 100% down and invest for your future retirement; enjoy the weekends and holidays too at a bargain price!
If you look around you can easily find homes for less than $100K.
Please don't bother becoming a landlord if you are just going to view your tenants as your "cash cow" and not people to whom you are responsible for upkeep and problem solving, unless you plan to hire that part out to someone who will do it well.
@RockCandy96 - To qualify for the best rates, you may owe no more than 80% of the appraised value of your home. Since your home appraised at 78k, you may owe no more than 62.4k to get that nice 3.5% rate. Do you have $8,600 + closing costs tucked away in a savings account? If not, do you have any way to raise it? (An extra car to sell, the ability to borrow at 0% for a year or two from a credit card, etc.) How about taking a second mortgage for the $8,600 + closing costs? Talk to your lender about that (rates, fees, etc.)
You're close to being able to make it work. Think big picture. What can you do to close the gap? Good luck!
Good Luck negotiating with Credit Card companies. Twice, in the past week I was told No. I have two major cards, both have higher rates, double my credit union card. I called them both. I have good credit scores, I pay at least my minimum every month and am never late. I deserve better that 18 or 19% cards.
I even informed them of my credit history and my history with them. The feds should do something about these high rate robbers.
Your local credit union is a great resource. I refi'd with no cost to me, lowered my interest rate and term. A home run. Most will let you open an account for as little as $5.00 to be eligible to apply...
Goodbye Bank of America....Hello Philadelphia federal credit union!
Me and my husband wanted to refinance our 30 year mortgage at a 6.5% interest rate to a 15 year mortgage and a 3.5-4.5% interest rate. Turns out, even though we are not underwater, we are not far enough ahead to qualify. How does that make sense?? We owe $71k and house is worth $78k...Was told we can only refinance if the house was worth over 90K...
My home loan had a balance of 105,000 and I had a equity line of credit which was adjustable but has been sitting a 3.25 percent for the last couple years. Balance on that loan was about 55k. I really wanted to get rid of that Heloc loan! My home loan rate was initially a 20 year loan at 5.375 percent with like 11 years left on it. I just refied and combined the loans to a 15 yr loan at 3.375 percent which I feel really good about now.
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