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How to profit from low interest rates: with rates at their lowest since the 1960s, times are bounteous for borrowers, lean for lenders - Money Management - Brief Article

Black Enterprise, Dec, 2001

While investors are reviewing their 401(k) plans, they shouldn't forget about other areas of their finances that need fixing. Everyone should look at the debt they have and see if they can find better interest rates. After the terrorist attacks of September 11, the Federal Reserve put the pedal to the metal to keep the economy from stalling. Within three weeks, the key federal funds rate was cut for the eighth and ninth times this year. Since January, it has toppled from 6.5% to 2.5%, a 39-year low. Other interest rates fell in sync, making this a great time to be a borrower rather than a lender. --D.J.K.

HOME MORTGAGES

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The national average rate for 30-year mortgages fell below 6.2% in October, which is near the lowest rates ever reported, according to www.bankrate.com. "If you already have a home mortgage, this is an ideal time to refinance," says Stephanie Simon, vice president of emerging markets at Wells Fargo Home Mortgage (www.wellsfargo.com), from her firm's Silver Spring, Maryland, office. "If you're not a home owner, lower mortgage rates make buying a home more affordable." You might also get more home for your dollar. Either way, you have many mortgage options to choose from. "A 30-year fixed-rate loan is the most popular mortgage term people are choosing," says Simon. "However, many borrowers are choosing 10-, 15-, or 20-year mortgages instead. The rates are a bit lower and you might save tens of thousands of dollars in interest payments over the life of the loan."

Yet another alternative is an adjustable-rate mortgage (ARM). "Our most popular adjustable-rate loan," says Simon, "is the 5/1 ARM, where the initial rate changes after live years, then is adjusted annually. Going from a 30-year loan to a 5/1 ARM might cut your rate by around 0.5%, so this is a good choice if you don't expect to be in the home longer than five years."

HOME EQUITY LOANS

These lines of credit are secured by your home. Recently, the national average interest rate on such loans was around 7.5%. "The interest you pay is tax deductible in most cases," says Greg McBride, a financial analyst at Bankrate.com, based in North Palm Beach, Florida. "That's not the case for many other types of loans, such as auto loans and credit card debt."

Some homeowners apply for a home equity loan (HEL), then use it to pay off other debt. If your effective tax bracket is 30%, for example, paying 7.5% on a HEL is like paying 5.25% (70% of 7.5%) after tax, a much better deal than paying 8% or even 14% on other loans. "The danger," says McBride, "is that you'll extend the term of your debt by going with a HEL. If you were on a schedule to pay off your credit card debt or your car loan in three years, keep up those same payments after you switch to a home equity loan."

AUTO LOANS

These fixed-rate loans generally are repaid in three to five years, "Rates have come down," says McBride, "but refinancing might: not be the best move. You may be going from a new car loan to a used car loan, which [typically] has higher rates." Recently, new car loans averaged below 9%, while used car loans were nearly 10%.

If refinancing a new car loan doesn't make sense, consider paying it off' with a lower-cost, tax-deductible home equity loan. McBride says you should pay it off, even if you have to prepay with extra cash. Paying down a 9.5% car loan is the equivalent of earning 9.5%, after tax: Where else can you find a deal like that today?

What's more, now may be an excellent time to make a trade for new wheels. To stimulate sales, automakers' finance companies are offering great: financing deals: In October, three-year, interest-free loans were available.

CREDIT CARD DEBT

The good news is that most credit cards impose variable interest: rates, so they've come down as the Fed has announced cut after cut, The bad news is that the average rate was around 14% during fall 2001, and that's 14% after tax, because interest on credit card balances isn't deductible.

"Pay off your credit card debt as rapidly as possible," says Giles Almond, a financial planner with Matrix Wealth Advisors (www.matrixwealth.com) in Charlotte, North Carolina. "You can use a home equity loan to pay it off, replacing credit card debt with lower-rate, tax-deductible home equity debt." A similar move is to refinance a home mortgage for an amount greater than the old loan and use the excess proceeds to pay off your credit card debt.

Almond suggests yet another alternative. "You probably get credit card offers promising you no interest or low interest rates for a few months," he says. "Take advantage of those offers by rolling your existing credit card debt into new cards, at low rates. When the initial offer expires, roll [the debt over] to another low-rate card."

SMALL BUSINESS LOANS

Such loans generally are variable rate, so they've fallen this year along with other interest rates. Therefore, this might be a good time to call on your friendly banker.

If you already have a small business loan in place, lower rates mean lower required payments. "You probably have two options," says Almond. "You can make smaller payments or you can make the same payments and pay down your loan faster."

How to profit from low interest rates: with rates at their lowest since the 1960s, times are bounteous for borrowers, lean for lenders - Money Management - Brief Article

Black Enterprise, Dec, 2001

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