Consumers have an average of $12,000 in debt according to research. That debt comes in the form of home mortgages, car loans, credit cards, student loan debt, and many other, mostly unsecured debt obligations. Recently, events in Washington, mostly thanks to the United States Federal Reserve, has caused core interest rates to fall. Are these interest rate cuts helpful to you?
If you’re thinking that this is old news, you’re right, interest rates have been falling but what we’re talking about is another leg down. Mortgage rates for the best qualified buyers have dipped below 4%, a low not seen in decades.
The 10 year treasury yield is hovering around 2% and the Federal Reserve has gone on record saying that they will keep the Federal Funds rate between 0% and 0.25% until at least 2013, an unprecedented move. This has caused interest rate cuts throughout the financial industry.
Most consumers don’t care about treasury rates, federal funds rates, and most aren’t purchasing homes right now anyway so how does this news affect your family’s bottom line?
Largely, these recent interest rate cuts don’t affect any of your loans. If you have student loans, they are almost certainly locked in to a certain interest rate and since interest rates have been falling for a couple of years, you probably already consolidated your loans. If you haven’t, you can consolidate now but all of those loans are packaged and a weighted average of the interest rates becomes your new rate. Try to lock in a rate below 5%.
Consolidation of student loans isn’t as simple as it sounds, though. Only certain loans are eligible for consolidation and you can’t consolidate a mix of public and private loans.
Remember that rate that the Federal Reserve promised to keep at near 0% until 2013? That is what your credit card interest rates are based on so don’t look for much help there either. If you have an existing credit card and the rate is above 15%, ask for a review of your rate if you have a spotless payment history. If you don’t, your chances of a lower rate are slim. If you are a disciplined money manager and you can commit to paying your card off within a year to 18 months, consider a balance transfer to a zero interest rate card. That 0% rate will turn in to a rate that may be higher than your original card. Unfortunately, recent interest rate cuts aren’t going to help your credit card.
If you own a home and you haven’t refinanced since 2008, now might be the time. With interest rates at a historic low, now is the perfect time to find a mortgage refinance calculator online and see if the money you save each month is worth the cost of the refinance.
If you’re considering buying a home, the market is customer friendly but what about your finances? As a general rule, you need an average credit score of 740 and at least a 25% down payment in order to qualify for a loan.
When you hear that interest rates have fallen, the actual benefit to you is often very little. You’ve heard it before but it can’t be repeated enough: The best way to gain better financial footing is to eliminate as much of your debt as possible. This makes any discussion of interest rates largely unimportant to you.