Unsure How to Profit from the Low Interest Rate Environment?

Interest rates remain at unbelievably low levels and the Fed has stated that they may remain so until late in 2014.  Retirees and others who like to invest in bank CDs and other low risk investments hate this low interest rate environment, and rightly so since they are earning less than the rate of inflation on these investments.  But there are ways that you can profit from today’s low interest rates.

You may have already refinanced your mortgage and may be thinking about doing so again.  If you have not refinanced, now may be a great time to do so as rates on a fixed rate 30-year mortgage can still be had for around 4 percent and even lower on a 15-year term.  But there are some caveats.  Closing costs can be high, ranging from $2,000 - $3,500 and you will need good credit.  You need to do some number crunching, and if you are not comfortable doing this get some help.  One strategy that I like is refinancing from a 30-year to a 15-year term.  This can work well if you have built up some equity (have made eight to ten years of payments).  You can get a slightly lower rate on a 15-year term and often the monthly payments will be only slightly more than your current payments.  The benefit is the savings in interest costs from reducing the term to 15 years and the lower interest rate.  Also, be sure to calculate the time required to recover your closing costs.

Another way of benefiting from the lower interest rate environment is reducing or eliminating other indebtedness, specifically high interest credit card debt.  Credit card interest rates range from approximately 12 to 24 percent.  In my opinion no one should be paying this level of interest today, but many are.  Are you having deductions made from your pay checks for your 401(k) plan, credit union or other savings plan?  Consider stopping these deductions at least temporarily and using the money to pay down credit card debt.  One exception, to this suggestion is to continue 401(k) contributions if there are matching employer funds.  This is “free” money, but once you have received the maximum stop contributing and use the funds to pay down credit card indebtedness.

Take a look at any outstanding loans you may have with variable interest rates.  Most home equity credit lines have variable interest rates that are tied to published rates such as prime, Libor or the bank’s lending rate to its’ best customers.  Rates on bank home equity credit lines are likely to be quite low now (mine is currently 2.5 percent).   Look at your home equity credit line indebtedness with the goal of reducing it while rates are low.  It will be more difficult to pay down principal when interest rates begin climbing.  I am not sure that these low rates will last until 2014 given our country’s current level of debt and the Congress’ difficulty in cutting spending.