Taking Advantage of Low Rates
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While go-go lending was 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 right now. At press time, average rates for 30-year fixed-rate mortgages, home equity loans and even 60-month new-car loans are hovering around 4.3 percent, 6.8 percent and 5.3 percent, respectively, according to Bankrate's 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 in West Palm Beach, Fla.
"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.
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, 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, author of "Control Your Cash: Making Money Make Sense."
Not only are mortgage rates and property values low, but the rash in foreclosures mean 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.
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 percent 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 percent 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."
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 percent, according to Bankrate's weekly survey, and some car loans are 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.
Give Money Away
If you are fortunate enough to have extra 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 IRS -- 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.
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.
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.
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.
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.