By: Gene Walden, Senior Finance Editor October 01, 2019
You may be able to take advantage of a low interest rate environment by making some changes in your financial situation. Here are nine steps to consider to help save money on your debt, lower your monthly payments, refocus your investment strategy, or improve your lifestyle:
1. Refinance your mortgage
If you bought a home while interest rates were higher, you may be able to cut back significantly on your monthly mortgage payment by obtaining a new mortgage with a lower rate.
The average 30-year fixed mortgage rate has been about 3.75% in recent months, according to the Federal Reserve1. The interest rate you qualify for may vary according to your credit rating. If your current mortgage is around 6% or higher, you may be able to gain significant savings by refinancing – particularly if you plan to stay in the home for many years to come. For example:
- Let’s say you have a 6.5% 30-year mortgage of $200,000. That would equal a monthly payment of about $1,315.
- If you could reduce that to a 3.75% rate, your monthly mortgage cost would drop to about $926 – a savings of nearly $400 a month.
However, there is one mitigating factor to keep in mind – closing costs, which are the fees you pay the financial institution to process the loan:
- Closing costs are typically in the range of 1 to 1.5% of the loan.
- For a $200,000 home, the average closing cost is about $2,128, according to Bankrate.2
- That means that if you can save $390 a month by going from 6.5% to 3.75% on a $200,000 mortgage, you could recoup your $2,128 in closing costs in the first six months. So even if you don’t know how many more years you’ll be in the home, refinancing would appear to be worthwhile in this case.
- At the other end of the spectrum, it may not be worthwhile to refinance for a rate reduction of 1% or less unless you are committed to being in your home for years to come. On a $200,000 mortgage, going from 4.75% to 3.75% would only save about $80 a month, so it would take more than two years to make up for the closing costs.
Another option to consider would be to take out a 15-year mortgage, which typically comes with a lower interest rate than the 30-year mortgages:
- The average 15-year rate was 3.22 % as of July 2019, according to the Federal Reserve3
- That was 0.53% lower than the 30-year rate.
While your monthly payment may not drop with a 15-year mortgage (in fact, it could increase), the shorter term will enable you to close out your mortgage faster while paying significantly less on interest payments.
2. Buy a home
Although home prices have been rising in many parts of the country, the current environment may be a good time to buy your first home or upgrade to another home that better suits your needs. By buying now, you may be able to lock in a mortgage at one of the lowest rates in many years.
3. Choose a fixed rate mortgage
If you are considering buying a home, you might consider choosing a fixed-rate mortgage over a lower interest adjustable-rate mortgage, particularly if you plan to live in the home for many years. According to Freddie Mac (the Federal Home Loan Mortgage Corporation), the average rate on 5-year adjustable mortgages was 3.46% as of July 2019.4 While an adjustable-rate mortgage may save you money on your mortgage payment in the short-term, if interest rates begin to move up in the future, your rate will rise along with the market and, possibly, balloon. But with a fixed-rate mortgage, your rate is locked in for the entire pay-off period.
If you are already a homeowner with an adjustable-rate mortgage, and you plan to stay in your home for many more years, you may consider refinancing to lock in a fixed rate. Although the fixed-rate would be somewhat higher than the adjustable rate for now – and you would be required to pay closing costs – down the road, if interest rates rise, you may be happy you made the switch.
4. Buy your second home now
If you are planning to buy a second home, this may be the time to do it while mortgage rates are low. Even if you can’t land a bargain in the housing market, you may still be able to lock in a favorable mortgage payment for a second home at today’s low interest rates.
5. Refinance your student loan
If you have a student loan from a private lender, you may be able to take out a new loan at a lower rate. A number of banks and financial organizations offer to refinance student loans at interest rates as low as 2.5 to 3.5% for adjustable loans and 3.5 to 5% for fixed rate loans.5 With a lower interest rate, you may also be able to extend the terms of your loan in order to reduce your monthly payments further. Shop around for a lender who will provide a competitive rate and appropriate terms. Be aware that some lenders will charge a fee or closing costs to refinance your loan.
6. Refinance your car loan
There are several reasons you might want to refinance your car loan. Perhaps you bought your car at a time when rates were higher or your credit score was lower – which meant you weren’t able to lock in a competitive rate. Or maybe your current monthly payment is squeezing your budget. This may be a good time to shop around for a better rate. By refinancing your auto, you may be able to lock in a lower interest rate and reduce your monthly payments.
7. Consolidate your debt
Do you have several different loans outstanding that you’re paying on each month? Many consumers have auto loans, credit card debt and even college loans that may carry interest rates higher than the current market rates. By consolidating your debts, you may be able to reduce your monthly payments with a lower interest rate and cut back the number of bills you pay each month.
To consolidate your bills, you may need to go online or talk with a bank or financial institution about a personal loan or line of credit that would allow you to consolidate your bills and lower your interest. If you own a home, you may be able to get a competitive rate by taking out a home equity loan or a home equity line of credit.
8. Pay off high interest credit card balances or move those balances
Many credit card companies will let you transfer your debt from other credit cards with an extended grace period of 12 to 20 months to pay off that debt at very low or even 0% interest. Keep in mind that there is usually a balance transfer fee in the range of 3 to 5%. You should also be aware that when the grace period is over, your interest rate on the unpaid balance will likely balloon back up to the normal credit card interest rate, which has been in the range of 12 to 25%.
Even if you’re not able to pay off the balance entirely during that grace period, you should be able to make a bigger dent while paying a low or 0% interest rate. For instance, if you maintain a $5,000 balance with a 20% annual interest rate credit card, you would pay about $1,000 in interest payments over a one-year period. That means that with a 0% interest rate credit card, you could reduce your credit card debt by nearly $1,000 while making payments of the same amount (minus the transfer fee, which would be about $150 to $250 for a 3% to 5% transfer fee).
One more option: rather than using a balance transfer with another credit card company, you might consider taking out a bank loan or home equity line of credit to pay off your credit card debt. While you wouldn’t get a 0% interest rate, you may be able to negotiate a rate that is significantly lower than your current credit card rate. That would allow you to pay off your debt over time at a lower rate without the credit card balance transfer fee and the prospect of facing a ballooning interest rate when the grace period expires.
9. Invest more rather than paying off your low-interest mortgage and loans early
Consumers are sometimes advised to pay more on their monthly mortgage to reduce the number of years required to pay off the loan. But if you need to save for a new car, an education fund for your children, home improvements, your retirement fund, or any other major anticipated expenses, you might want to think twice about paying extra on your monthly mortgage.
If you already have a mortgage with a competitive rate, rather than to pay off your mortgage faster, you may consider investing your extra money to achieve your other financial objectives. While investing involves risk, with interest rates at historically low levels, the cost of borrowing is lower now than it has been over the past few decades. Since 1985, 30-year mortgage rates have dropped from about 12.5% to 3.75% in 2019,6 which means the money you borrow at today’s rates costs nearly 9% less than it would have 33 years ago.
What does that mean in terms of investment earnings? While past performance does not guarantee future returns, and investing may involve the risk of loss of principal, to illustrate the significance of the rate differential, let’s use the average annual return of the S&P 500® for the past 50 years, which is about 11%.7 (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.
(These examples are strictly for illustrative purposes and do not reflect actual performance of any particular security. You cannot invest directly in an index.)
- With mortgage rates at 12.5% (as they were during 1985), an 11% stock market return would have given you a loss of 1.5% on money borrowed at that 12.5% rate.
- With mortgage rates at 8% (as they were during 2000), an 11% annual market gain would have given you a positive margin of 3%.
- With a 3.75% mortgage rate (as they have been in 2019), an 11% annual market gain would give you a margin of about 7.25%.
Thrivent Mutual Funds makes it easy for you to get started with an investment plan. If you don’t have the $2,000 to meet the fund minimum, that’s no problem. As long as you commit to being a disciplined investor and set up an automatic investment of $50 a month or more, we’ll waive the minimum balance. Click here to get started.
This website is not intended as a source for legal, accounting or tax advice or services. Work with your attorney and/or tax professional for additional information.
1 Source: Federal Reserve Bank of St. Louis, average mortgage 3.75%, July 2019
2 Source: Bankrate, September 2016
3 Source: Federal Reserve Bank of St. Louis, July 2019
4 Source: Federal Home Loan Mortgage Corporation
5 Source: ConsumerAdvocate.org, July 2019
6 Source: Bankrate, July 2019
7 Source: New York University
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