3 Ways To Take Advantage of Low Interest Rates

3 Ways To Take Advantage of Low Interest Rates

low interest rates
“House for Sale” by 401(K) 2013 is licensed under CC BY-SA 2.0

At the beginning of 2020, few people expected interest rates to come down. Four months later, rates were back at zero after the Federal Reserve took drastic action to counteract the anticipated economic impact of the coronavirus pandemic.

Near rock-bottom interest rates could be around through 2023, according to the Fed, which plans to wait for full employment to return before raising them.

Low interest rates mean lower borrowing costs, making this a good time to consider financing big-ticket items if you can afford the monthly payments and costs of ownership. They also make refinancing existing debt an option, especially since the debt probably accrued when rates were higher.

Low interest rates aren’t always good news. Yields on savings and cash management accounts fall when rates fall, reducing returns.

Here are three ways to take advantage of low interest rates.

Buy a home

The U.S. real estate market is booming as Americans rush to buy homes during the pandemic, hoping for more living space and record-low mortgage rates.

Searching for a home during the worst economic crisis since the Great Depression is easier said than done, according to Moneycrashers.

Black people are historically less likely than whites to own homes. In late 2019 a turnaround began: As Black unemployment fell to historic lows, the Black homeownership rate began to rise, hitting 47 percent in the second quarter of 2020, the highest since 2008, Wall Street Journal reported.  

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As mortgage rates have fallen, demand has surged and lenders have tightened standards. A mortgage credit availability index from the Mortgage Bankers Association dropped about 33 percent between February and August.

If you’re confident enough in the current economy to make what will probably be the biggest purchase of your life, the low-rate environment justifies doing so. Purchase loan rates are at or near multiyear lows. Small rate changes have huge impacts on borrowing costs. Dropping the rate on a $200,000 purchase loan with a 30-year fixed rate from 5 percent to 4 percent saves nearly $43,000 in interest over the life of the loan and reduces the monthly payment by about $120 — more than 10, according to Moneycrashers.

Invest in Gold

Low interest rates, easy money policies and an uncertain economic outlook play into gold’s favor, US News reported.

The price of gold often “runs counter to stock market or economic fluctuations,” said Spencer Campbell, director at SE Asia Consulting Pte Ltd. “Gold is perceived by investors to be one of the best investments, recovering quickly from economic downturns.”

Gold is good for diversifying assets. It’s often considered to be an asset class separate from stocks, bonds and other commodities, and used to diversify risk.

Gold reached a record high above $2,000 an ounce, and some think it will go higher. Warren Buffett, who said gold is a bad investment, inspired interest in gold investment and gold stocks after Berkshire Hathaway reported a new equity stake in Barrick Gold.

Refinance student loan, car loan or mortgage

With the rate on 30-year mortgages at an all-time low less than 3 percent, the math is in current borrowers’ favor when it comes to refinancing.

If you have more than five years left on your mortgage and your current rate is at least 2 percentage points higher than your probable refinance rate, you can probably make money on the deal, according to Moneycarshers.

Refinancing a $150,000 mortgage with 20 years left on the term at 7 percent annual percentage rate to a $150,000 loan at 4 percent and a 20-year term saves more than $50,000 in interest. That doesn’t include closing costs, which can be 5 percent of the refinanced amount.

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In some cases, 30-year mortgages could be refinanced into 15-year mortgages and the borrower would still have a lower monthly payment, said Craig Kirsner of Stuart Estate Planning Wealth Advisors.

If savings on monthly payments are re-invested in low-fee index funds, for example, the long-term financial benefits would be even greater, Kirsner said.

The same logic applies to auto refinance loans, especially if your credit has improved since you bought your car or you used dealer financing, which tends to be more expensive than bank or credit union financing.

Refinancing student loans can give you a lower monthly payment, but you could forfeit benefits such as 10-year loan forgiveness for qualifying public servants.