The pledge by the Board of Governors of the Federal Reserve System to keep interest rates low for at least the next two years provides an opportunity for consumers to get more for their money. Millions of people have taken the opportunity to pay off debt during the past three years, cleaning up their personal balance sheets, so now may be the time for them to take advantage of low rates. Especially for people who budget and plan accordingly, this can be a smart way to use credit wisely and get out of debt faster.
Like most of us, I want the economy to show much more strength before I make any significant changes to my spending and investment plans. But for others, the time may be right.
Five major purchases or financial moves to consider while rates are low
Buying a home. While low interest rates are not reason enough to make the plunge into home ownership, for consumers already considering buying, it may just be the right time. In many markets, home sales and prices are relatively steady or have begun to rise slightly. Rates on long-term, fixed-rate mortgages are at their lowest in decades.
Not sure how much house you can afford? FHA and VA government loan programs may allow you to apply a higher percentage of your gross monthly income towards a home loan, and the various mortgage companies may also have a different percentage; at CredAbility we recommend no more than 38 percent of your income should go towards housing obligations.
Buying a car. While car loan rates have not dropped as significantly as mortgage rates, they have begun to come down, and many manufacturers are offering special financing options and other incentives. If you really need a new car, do your homework. Know what you want to buy, and compare offers to ensure that you are getting the best deal.
Refinancing. If you are in an adjustable-rate mortgage and plan to stay in your home, this is a great time to refinance into a fixed-rate loan. It may also be a good time to refinance your long-term, fixed-rate mortgage. If you purchased a $225,000 home five years ago and had a rate of 7 percent, your payment was about $1,500 per month and you have already paid more than $76,000 in interest. Refinancing the balance of that loan now at 3.5 percent for 15 years will save you almost $175,000 over the life of the loan and let you pay off your home almost 10 years sooner. Plus, your payments will only go up about $25 per month. Each situation varies; you can visit www.bankrate.com or Equifax Mortgage Match and use those calculators to compare rates and payment.
Paying off your debt. Even if you’ve paid down your mortgage, home equity, and credit card debt during the past three years, you still may want to pay off more debt. Many certificates of deposits and savings accounts are paying little to no returns, and consumers will be better off in the long run to reduce or eliminate their credit card debt. It may also be a good time to negotiate rates with your creditors, especially if you have maintained an on-time payment record and have continued to make at least minimum payments.
Reviewing your investment options. If you can afford to send more money to your 401(k) or 403(b) account, do it, especially if your employer continues to match or contribute to it as well. In addition, talk with your financial advisor about alternatives to savings and money market accounts. It may be the right time to expand your investment portfolio and explore options to earn greater returns on your savings.
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