Interest Rates Staying Low For A While – My Action Plan
In their most recent attempt to try and control the economy (notice I said try), Ben Bernanke and the US Federal Reserve made another carefully-worded psuedo-commitment earlier this week:
The committee currently anticipates that economic conditions – including low rates of resource utilisation and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
Usually they don’t talk about firm dates, so many analysts that spend their lives parsing these FOMC statements take this to mean that interest rates are very likely to stay low for a while. Low interest rates are usually bad for savers and good for debtors. Since I am both due to my mortgage, here are my action plans in response:
1. Buy more flexible, longer-term CDs. If interest rates on savings accounts will be low for a couple of years, any kind of “bump-up” CD like the Ally 2-Year Raise Your Rate CD paying APY is unlikely ever to be triggered. Instead, I still like the Ally Bank 5-year CD that currently yields APY with a 60-day interest penalty. The rate on this CD has been dropping regularly since I bought some initially at 3% APY and more at around 2.40% APY. But this way, I keep earning the higher rate as long as rates are low. More details here.
2. Refinance my mortgage. Every time I think rates won’t go any lower, they do. Even though I am currently at a 30-year mortgage at a 4.75% interest rate, I am seriously considering a 15-year mortgage at 3.75% that will actually leave me with a nice cash-out. This will be a commitment to continue my extra principal payments, but saving thousands of dollars a year in interest is a good incentive. Check out the major loan match/FHA/VA comparison sites like and Quicken Loans, but also compare with credit unions like PenFed and NavyFed if you are eligible. It’s a good time to explore your options.
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Jonathan-any thoughts on cash-in refi’s? I’m sure a lot of us are underwater and are awaiting or considering appraisals to see if a refi is even feasible.
I bought a co-op with a 10% down payment 3 years ago (5.125%), and locked yesterday at 3.75 for a 20yr with 2k toward closing costs covered. The other option was a 15 year at only 3%…tempting, but leaning toward being conservative about the monthly payments. All of this hinges on the appraisal though, so it’s wait and see. I figured it’s worth the fees and appraisal cost just in case I can make this work.
soon they will pay you to take out a loan, so you might want to hold out for that
<– That was for 30 year. Not the best rate because condos are treated like leprosy, but a 1 year breakeven for us.
We have a condo with over 80% LTV so we are kind of hosed to get a smokin’ rate, but yesterday we did lock in at 4.375% with zero points and about $2,000 in fees, in CA. If it was a house and our LTV was good, probably could of got 4.25% zero points, and very little fees.
Jonathan, given that you have savings and some flexibility, why not consider a 5/1 ARM? The rates are as low as 2.5. While we’re probably at historical lows, why not save yourself some money over the next 5 years, with a plan to figure it out later. I also think that things change more than most people anticipate, and most people are either going to refinance because of rates, or have some type of housing change that it’s better to save money now.
Ally also now has a 4-year, raise your rate twice CD.
After reading @Phil’s comment, I started an application with TD Bank to refi an investment property. Unfortunately, they don’t operate in my state. Dang!
@Jonathan – we did a zero cost with AmericanInterbanc in July at 3.75% for 15 year loan (even got couple hundred back because out title/escrow company charged less than Interbanc’s GFE), they are offering zero-cost 15 years at 3.625% today.
@Dave – it can be done but unless you’re at 80/20 LTV, it may not be worthwhile.
Is it easy to get refinanced if you bought your home recently? We bought our home 5 years ago with nothing down and I’m sure it would no longer be appraised at the purchase price due to other foreclosures/short sales in the neighborhood.
We are heading to the bank tomorrow for a no-closing cost refinance! We’re also at the 4.75 rate right now and will be going down to 3.75, assuming nothing crazy and unexpected pops up on the credit report tomorrow. We bought our house in April, so we are very pleased to lower the interest rate this early in the game.
Our current min payments are 1040, but we pay 2000. Our new min payments will be 1450, but we will still pay 2000.
We got an 90/10 loan the first time around, with the 90% being a 15-yr ARM, and the 10 a 5-yr balloon. We were paying enough to have the balloon knocked out in 5 years, but just sold our car to finish that off. It feels so great to have that paid already, only 4 months living in our house! The extra principal we were paying will have the 90 paid in 10 years (if not sooner now due to having the 10% paid off)
The new loan will be 90/10 as well, but a 10-yr fixed and another 5-yr balloon. We are sort of excited to have “two loans” again, so we can focus on paying off the small one, get the psychological benefit from that, and then put what we were paying toward the big loan.
Figuring in what we were already going to save from paying the loans off early, this refi will save us $5000 and give us a bigger incentive to pay everything off within 10 years. Once the house is paid, we’re debt-free and staying that way!
I locked @ 3.5% for 15 yr fixed for purchase a investment property with 0 points at TD Bank over the weekend. Even other mortgage brokers (from other companies) told me they have the best rate for investment loans.
Yes, once I get more details I’ll post more. Anyone else lock in any good mortgage deals this week?
Jonathan – on the refi, it might be an interesting post to detail out the difference between a 15-year 3.75% vs. a 30-year 4.25% where you make additional principal payments each month. The monthly payment might end up being similar, but the 30-year would give you the flexibility of not paying the extra principal, if you needed the cash. I am not sure how that would impact total interest paid over the life of the loans, however.
I would be getting negative points. I just don’t want to pay anything this time around, in case I refinance again. This will be my 4th loan modification/refi in only 4 years!
When you say “nice cash out” are you talking about negative points on that rate or actually doing a cash-out refi? I didn’t think those were available anymore. Also, wouldn’t that just negate the idea of making extra principal payments up to now?
Now is a great time to refi that 30 year mortgage to a 15. And then work to pay it off in half time or less !
For a little more risk, look at some good companies that pay a nice dividend. BP, Exxon, Conoco, Chevron all have yields above 2.5% and are close to their yearly lows. Oil prices should stay relatively high since the dollar is weak.