credit & debt

Take Advantage of Low Interest Rates Now

Before rates rise, consider refinancing your variable rate loans and taking opportunities to minimize the costs of transferring wealth to family.

The Federal Reserve recently decided to keep interest rates at their current levels, again. While the nation still expects interest rates to rise, many investors are scaling back their predictions from four increases in 2016 to maybe one—and given the Brexit fallout, possibly zero.

Since the timing of rising interest rates is somewhat unpredictable, now is the time to use the historically low interest rates in your favor before it's too late. You can take advantage of current opportunities to ensure you achieve your personal goals, whether you want to purchase a second house on the lake or transfer wealth to your family or a charity.

Now Is The Time To Borrow

Debt is risk. Your lender risks losing capital if you can't pay back what you borrow, and you risk losing your home if you can't keep up with mortgage payments. As interest rates may rise again soon, now is the time to review your existing debt and determine what the risks and opportunities are.

Remember, it's not about borrowing money because it's cheap; it's about borrowing intelligently.

If you have a variable interest rate on any debts, consider refinancing into a fixed, long-term loan because increasing interest rates mean your payments can go up and, in some, cases balloon. Variable rates on these types of loans generally increase annually, so if the Fed raises rates a few times in one year, you may see a monumental increase in your payments.

For example, if you hold a fifteen-year variable rate mortgage, you may not be able to afford payments if your rate increases from 2% to 6% over the course of a couple years. By locking in a low rate at the right time, you can save yourself from having to sell your home or other business asset because you simply can no longer afford the payments.

The same holds true if you are looking to purchase a second home. If you are considering holding off for a couple years to accumulate a higher down payment, you may wind up with a higher interest rate that may mean you can't afford a vacation home at all. Speak to a financial planner to determine if this is something you can afford now.

Think ahead to your long-term, personal and financial goals. You might find other opportunities for which you can take advantage of the current low interest rates. For example, you could pay for an upcoming wedding with credit or a loan instead of dipping into savings. This way your money can still work for you while you pay back the loan. Or if you're carrying a large balance on your home-equity line of credit, consider refinancing to lock in a low fixed interest rate. Same goes if you have a variable-rate student loan from a private lender.

Remember, it's not always necessary to pay off your debt as quickly as possible. When you have low interest rates for items such as a mortgage or student loan, which may be wholly or partially tax-deductible, it may not be worth paying them off right away, if it means dipping into your higher earning savings.

While this theory goes against many financial planners who advise that debt should be minimized as you get older, borrowing now while the rates are low may help you achieve your financial and personal goals.

Passing It Along

Many people may want to leave what they worked hard for all their lives to their children. "Gifts" given to your family throughout the year may be subjected to gift taxes, but leveraging the current low interest rates to transfer wealth can put more of your hard-earned wealth in the right hands.

A grantor retained annuity trust (GRAT) or charitable remainder annuity trust (CRAT) is based around the idea of placing assets into a trust for a certain period of time. The one who creates the trust collects an annuity for its duration based on the current low interest rate or a negotiated rate, with the remainder passing tax-free to the family or a charity. In the case of a CRAT, the trust creator also gets a current tax deduction for the present value of the remainder interest.

Affluent families also use intra-family loans to support their children or pass on wealth. The minimum interest on such a loan, determined monthly by the Internal Revenue Service, is often lower than those sought by a third party, such as a bank. The loan can then be leveraged as capital for investment or even support the purchase of a home while the interest paid remains in the family. The highest IRS-stated interest rate percentage for long-term intra-family loans in June 2016 did not exceed 3% while short-term loans remained well below 1%.

Speak to a financial planner to determine what debt you are able to take on in order to meet your financial and personal goals. If you plan on transferring wealth to your children, low interest rates can help maximize the amount of money that remains in the family. But hurry, these historically low interest rates won't be around forever.

As the chief wealth officer, Andrew Bass is responsible for all strategic financial and life management services of Telemus. He works with high-net-worth members to ensure their financial life plans are designed to achieve realistic goals in both the short and long term.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

About the Author

Andrew Bass, CPA, CWM, PFS

Chief Wealth Officer, Telemus

As the chief wealth officer, Andrew Bass is responsible for all strategic financial and life management services of Telemus. He works with high-net-worth members to ensure their financial life plans are designed to achieve realistic goals in both the short and long term.

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