Low inflation is now a given. The Federal Reserve is content there’s no upward pressure on interest rates, and there might not be any until sometime in 1998.
So what kind of game plan have you mapped for your own personal finances in the months ahead?
Based on what’s been happening with interest rates, two savvy strategies might be:
1) Do your necessary borrowing now while rates are low. That especially includes new mortgages and refinancing, because if rates were to shoot up next year, your interest cost would skyrocket.
2) Immediately jump on the highest bank money market account and CD yields you can find. You don’t want to miss the boat before those numbers decline any farther; they’ve already fallen by about one-third of a percent in the past 11 weeks.
Despite the soaring stock market, readers still call and write to say they belong to the “I-like-federally-insured-accounts” crowd and want their investments guaranteed. But they’re still in the dark on where to park their money, how safe the outfit is and whether they should go long or short.
Good questions, except that investing should be only part of your banking strategy at this point in time. Today’s relatively lower loan costs–except on credit cards–are where you have the biggest edge.
For one thing, all mortgage rates are lower than they were at the end of 1996, according to Bank Rate Monitor. The average 30-year fixed-rate, $100,000 loan costs $6,180 less in total interest than it did then, while a 15-year loan for the same amount costs $1,454 less. By signing up for a new 15-year instead of a 30-year, you’ll slash your mortgage interest by a walloping $90,619 over the life of the loan.
What happens if you wait another year to finance a home and rates go higher, say, by a full percent? You’ll pay $27,591 more in interest on your 30-year loan.
Need cash? If you’ve been thinking about getting a home equity loan or line of credit, now’s the time to make the move. Why? Your total interest on a $20,000, five-year home equity loan has fallen by $77 thus far in 1997.
In the mood to trade in your old jalopy for a new set of wheels? Consider buying a used car instead. The interest cost on a four-year, $16,000 new car loan has risen by $75 this year, but used car rates are coming down because of the high quality of hundreds of thousands of two-year-old vehicles coming off lease.
The glut has increased competition among lenders. As a result, the gap has been narrowed by one-quarter percent between new and used cars, with the average rate on the latter at 10.47 percent vs. 9.45 percent on a new auto loan.
The big losers on the loan side will be people with bad credit. They’ll be able to borrow money, yes, but they’ll pay banks higher rates in an era of “risk-based pricing,” on which institutions are mopping up.
Folks who grab credit cards with low “introductory” rates, such as 6.9 percent or thereabouts, may get stung. Reason: Sometime in 1998 or sooner, their rate will adjust upward to the banks’ prime rate plus about eight or nine percentage points–and if inflation takes hold next year, the prime will certainly go higher.
The smartest move: Cut up your high-rate credit cards and use only the one with the lowest rate. Either consolidate the old, costly debt with a much cheaper home equity loan, or apply the savings to reduce the balance on the remaining card.
Savers may not have noticed, but bank savings yields are slipping in the low-inflation environment and they’ll undoubtedly slide some more. Average CDs, particularly those with longer terms, are as much as one-tenth of a percent below their levels of two months ago. And the declines are even more noticeable on the highest yields nationwide.
The top-paying five-year CD, for example, has tumbled from 7.23 percent at the end of April to 6.91 percent currently. That’s a total reduction of $160 in interest on a $10,000 account over all five years.
For the past eight consecutive weeks, more banks have been cutting savings rates than the number of outfits raising them. The ratio is now 10 to 1, the most lopsided picture in a year-and-a-half. With the prospect of even lower rates this year, and possible inflation next year, which would send the numbers bouncing back up, you might now consider locking in a 12-month CD. You’ll find a free listing of the highest-paying banks on the Internet at http://www.bankrate.com
– Latest rate trend. Most rates are down again. The 30-year mortgage is now at 7.4 percent.
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Robert Heady publishes Bank Rate Monitor, a newsletter based in North Palm Beach, Fla.
