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 utilization 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 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 likeand 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.
Find more in Banking, Real Estate | 8/11/11, 5:30am | Trackback
August 11th, 2011 at 5:50 am
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.
August 11th, 2011 at 6:20 am
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 !
August 11th, 2011 at 6:22 am
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?
August 11th, 2011 at 6:36 am
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!
August 11th, 2011 at 6:39 am
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.
August 11th, 2011 at 6:41 am
Yes, once I get more details I’ll post more. Anyone else lock in any good mortgage deals this week?
August 11th, 2011 at 7:22 am
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.
August 11th, 2011 at 7:35 am
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!
August 11th, 2011 at 8:17 am
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.
August 11th, 2011 at 11:13 am
@Dave – it can be done but unless you’re at 80/20 LTV, it may not be worthwhile.
August 11th, 2011 at 11:38 am
@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.
August 11th, 2011 at 12:55 pm
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!
August 11th, 2011 at 1:21 pm
Ally also now has a 4-year, raise your rate twice CD.
August 11th, 2011 at 3:43 pm
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.
August 11th, 2011 at 4:00 pm
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.
August 11th, 2011 at 4:04 pm
<– That was for 30 year. Not the best rate because condos are treated like leprosy, but a 1 year breakeven for us.
August 11th, 2011 at 8:39 pm
soon they will pay you to take out a loan, so you might want to hold out for that
August 11th, 2011 at 9:39 pm
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.
August 12th, 2011 at 5:19 am
We just locked at 3.25% (2600 closing costs) for a 15-year fixed. We’re bringing a little cash to the table to get down to 80% LTV, but definitely worth it. Our payment will the same as our 30-year mortgage was, but we’ll have chopped 10 years off the term.
The spread between interest rates on a 15-year vs. 30-year is larger (almost a whole point) than it usually is, so, to me, it’s a no-brainer to go with the 15-year.
There is a program out there (HARP) where you can get a refi even if you don’t have 80% LTV without paying PMI. I believe you have to meet a few criteria – one of which is that you have to have no PMI currently. Also, you have to stick with your current lender.
August 12th, 2011 at 8:58 am
We locked in a no-cost 3.875 on a 20-year. Down from a 30-year at 4.75. Will cost us approx. $200 more per month, but well worth it.
August 12th, 2011 at 10:19 am
Ben,
3.25% for 15 yrs is really good. What bank do you use? PenFed is offering 3.375% but they normally charge 1% origination fee.
Jonathan,
Thanks for brining the refinance topic.
Andrey
August 12th, 2011 at 10:53 am
I’ve been reading your thoughts about refinancing and noticed that nobody looks at the cost of this. No, I’m not talking about the closing costs or points (assume you took the 0 points loans) but the interest you already paid in the current or previous refis.
Take Jonathan example: in these 4 years of 30 years loans mortgage payments of say $400,000 initial balance he must have paid about $70,000 in interest so far.
Since the main cost of a loan is the interest paid he should find a new term and rate where the savings should be > $70k in interest!
How easy is to do that? Unless you take a shorter term, where the monthly payments will be almost guaranteed higher, there is no way even at the current low rates.
Or, if you don’t plan on ever paying off the loan just take the chance to lower your monthly payment (like rent) and don’t look back at the money already spent (or waisted).
In my case about 1.5 years ago I got a 15yr loan @4.5% and 6 months later I refinanced at 3.87%. At that point I had paid 8k in interest but the savings were 18k over the loan life so was worthed. Now I see these no closing costs offers @3.37% but with 20k paid already in interest doesn’t make sense to do it.
I wonder how many of you plan to pay off their home loan?
Thx,
Adrian
August 12th, 2011 at 12:17 pm
Go for the refinance Jon!
I refinanced through ING Direct and got a great deal. They gave me a $1500 credit toward my closing costs (which are already extremely low) and I was able to close at home on my computer using a secure online system. After everything was said and done, I reduced my interest rate by 1.375% and paid ~$350 out of pocket. And now I don’t have to use an Escrow company – I pay my property tax and hazard insurance myself.
It only took me 3 months to break even on my closing costs! You do have to have 80% equity in order to get a loan from them and it has to be your primary residence. They’re current advertised rates are very close to the rates they had when I refinanced last November and I’m pretty sure they are still offering a hefty credit.
They also have a cool option called the Easy Orange where you get a super low rate but have to restructure the mortgage (basically refinance at the current rate) every 5 years for a $500 fee. It’s great though if you are planning on paying down your mortgage aggressively to get the most bang for your buck.
August 12th, 2011 at 12:43 pm
Andrey Y,
BB&T. I had started with Wells Fargo at 3.875%, but due to their silly lock rules, they’re going to lose my business because a month later, BB&T is able to lock me in at 3.25. I’m possibly out $400 for the appraisal, but will more than make that up w/ lower payments.
Adrian – the amount paid in the past is sunk cost. It’s all about minimizing the interest paid in the future. I agree that it’s not smart to keep refinancing with another 30-year term, since, while that reduces your monthly payment, it may not actually save you any money in the long run. Unless you’re in financial trouble, you should never refinance for more years than you currently have left.
Ben
August 12th, 2011 at 2:25 pm
Ben,
Even if you call it “sunk cost” it doesn’t make me feel better. Isn’t this a term used by loan brokers to trap you in?!?
Also, why looking only in the future? What you paid in the past for the same home was your money and you need to account for otherwise your total cost(and/or efforts to refinance) is unjustified. That makes you essentially a renter (with liabilities) and banks richer.
Jonathan,
Regarding the source I use to check the available loans, that’s one you all know: amerisave.com . I refinanced through them last year and worked fine.
August 12th, 2011 at 4:16 pm
google has a new mortgage search. i locked a refi 30year for 4.25% last week using a company i found on that search. Interestingly, i called BoA, my current mortgage holder, as well and the best they could offer was 4.65% that included $2k more in points/fees. It pays to shop around. https://www.google.com/advisor/mortgages
August 13th, 2011 at 8:08 pm
Bob, thanks for the suggestion. The google tool brought up a lender that I actually have for a different rental property. Kinda funny. Their zero point 30 year fixed for this rental wouldn’t lower the rate much but I’d be taking 10k out of it and i’d lock in that sweet rate for 30 years.
Plus one big advantage I’ve seen of the refi – that one month delay between the last payment and the next usually covers most, if not all of the closing costs.
August 13th, 2011 at 9:27 pm
@Adrian
The term “sunk cost” isn’t supposed to make you feel better–it’s supposed to make you think more objectively.
As far as refinancing goes, you only look into the future because that’s the only thing you can change. You can learn from the past, but you can’t change it.
August 16th, 2011 at 10:16 am
TC “They also have a cool option called the Easy Orange where you get a super low rate but have to restructure the mortgage (basically refinance at the current rate) every 5 years for a $500 fee.”
With easy orange, when you refinance 5-yrs later- you pay “then current” rate. It is not the same rate that you locked at the beginning of the term. Also the refinance renewal fees are equal to two bi-weekly payments (but not to exceed 5000) and not $500.
August 16th, 2011 at 6:07 pm
Just refinanced from a 7/1 arm at 3.5% to a 5/1 at 2.5% with no closing costs. We were one year in to the 7/1 and didn’t think we would ever refinance. Our payment is now $200 less. Winning!!!!
August 23rd, 2011 at 11:46 pm
A 30 year mortgage is an amazing inflation hedge. I have no interest in owning a house, but I do wish I had a mortgage. While I haven’t done the math, my gut feeling is that longer-term mortgages are worth the slightly higher interest rates.