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Kate Mauldin is a newlywed with a soft spot for Ben Bernanke. Thanks to the Federal Reserve chairman's recent moves to cut interest rates, Mauldin sees a golden opportunity to buy a larger home and pay down credit-card debt.
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The prime rate -- the rate lenders give their most creditworthy customers -- dropped from 7.25% on January 1 to 6% on February 8. As a result, Mauldin and other borrowers who have top-notch credit can expect better deals on auto loans, credit cards, home-equity lines of credit and mortgages. To qualify, you don't need a perfect credit score (850 on the FICO scale, the most commonly used score). Borrowers with a score of 720 or better will be able to find bargains. And people who have a score of 760 or higher, like Mauldin, will qualify for the best rates.
If you have a variable-rate credit card or an adjustable-rate mortgage that's tied to the prime rate, you'll benefit automatically from lower rates -- eventually. In other cases, you may have to negotiate with your lender or troll the Internet to find a better deal. Good deals are harder to come by with savings. Interest-rate cuts hurt yields on savings accounts and certificates of deposit. But it still makes sense to boost your cash holdings in times of economic uncertainty.
Mortgages: Go for It
At 5.67% in February (plus an average 0.4 percentage point), the average rate for a 30-year fixed-rate mortgage was near a four-year low. A year ago, the rate stood at more than 6%.
That decline leaves Mauldin, 33, who manages a nonprofit clinic, itching to sell her 1,200-square-foot home in Raleigh, N.C., in which she has built up $95,000 in equity. She hopes to upgrade to bigger digs in nearby Durham with her husband, Matthew Barton, and their two dogs, Mavis and Poncho. "We can get twice the house for the same money in Durham," Mauldin says. "If we sell, we can pay off our debt immediately and have enough for a 20% down payment."
Despite tightened lending standards, home buyers are still calling the shots. That's especially true if you don't have to worry about selling a house in a down market, you can come up with a 20% down payment, and you plan to live in the house for at least five years (time enough to recover your costs and wait for a rebound in home prices).
Don't expect to get 100% financing. Banks require at least 5% down -- 10% in markets with declining home values, such as California, Florida and Nevada. Even as sales and home values drop nationwide, Mauldin expects her Raleigh home to hold its value. She says houses in her neighborhood continue to sell at reasonable prices.
If you're in the market for a house, it's foolhardy to wait for a slightly better deal on mortgage rates. Thirty-year mortgages aren't closely tied to the short-term rates over which the Fed has the most control. What moves fixed-rate mortgages is a change in long-term interest rates, such as the rate on ten-year U.S. Treasury notes. Even if short-term rates continue to fall, Kiplinger's expects the yield on ten-year Treasuries (recently 3.6%) to rise to 4.0% by midyear.
In addition, mortgage rates are influenced by factors such as inflation expectations, investors seeking shelter from the volatility of stocks and conditions in the credit markets. It's smart to take advantage of a low rate now rather than wait for something better to come along.
POSTED BY: Ruth (December 02, 2008 05:18 PM)
If a card issuer offers 0% inerest for 12 months, can they raise the interest rate before that time?
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