We’ve been in an era of historically low interest rates for several years, but rates are beginning to rise.
Most Millennials can’t remember a time when interest rates weren’t in the single digits, but the reality is that today’s interest rates are abnormally low. Dare I say, today’s rates are something that most people might see only once or twice in their lifetime.
As the Fed signals its commitment to keep raising rates, there’s no telling how high they will actually go. One thing is for certain, though: Your time to take advantage of low interest rates could be soon coming to an end.
There are a number of things Millennials can consider doing in an effort to make the most of today’s low interest rate environment and set yourself up for future financial success.
1. Lock in your mortgage rate.
The average age of a first-time homebuyer is 30.1, according to Ellie Mae Millennial Tracker. If you’re a Millennial who has been unsure of whether to take the leap into homeownership and are in a position to buy, now is the time to get serious about it.
Even if you haven’t found your dream home, there are advantages to buying a starter home or condo over the next 12 to 18 months, simply because you can lock in a lower mortgage rate.
Mortgage rates currently are hovering around 4.5%. Let’s compare that to the highest mortgage rate in relatively recent history, which was 1981: 18.45%. Ask your parents and older family members about mortgage rates when they bought their first homes and prepare to be amazed.
Let’s say you were thinking about buying a house for $200,000 today with an interest rate of 4.5%. Your mortgage payments (principal and interest only) would be $1,013 per month assuming a 30 year mortgage. But if you decided to wait, by the time you’re finally ready to buy, say the rates had gone up to 7%. That same $200,000 house would now cost you $1,331 per month.
2. Refinance your student loans.
There are two purposes for refinancing your student loans.
First, many students have multiple loans and make multiple payments. If you refinance, you have the potential to consolidate your different loans at one single rate. In some cases, you might even be able to shave off years from the lifecycle of a loan.
Second, refinancing could help you achieve a lower monthly payment. Depending on when you graduated, the rate that you were given could be higher than rates now. It never hurts to take a look at those rates and see if you can reduce how much you’re paying in interest.
One thing to keep in mind when refinancing student loans is that certain protections exist for government student loan debt for cases when your income isn’t high enough to repay or if you lose your job. These protections continue to change over time but they generally exist for government student loans, not private student loans. Although refinancing and consolidating your student loans could lower your monthly payment, it could also disqualify you from certain protections.
3. Invest in stocks.
In a low interest rate environment, the cost of borrowing for everybody is lower — including corporations.
When a corporation has a low cost of borrowing, the company is theoretically able to grow at a quicker and easier pace. For investors, that means the company’s stock price could increase.
Not only could the company’s stock price increase rapidly, but the company may pay higher dividends to shareholders because its balance sheet is healthier.
If you’re about to enroll in your company’s 401(k) plan for the first time and are unsure of how to allocate your portfolio, it may make sense to overweight equities. First, as a Millennial, you likely have the benefit of time on your side, as you’re unlikely to be retiring in the next few years and can withstand the relative risk associated with equities.
Generally, it makes sense to look at companies in the growth sector, as those are the ones that will be most inclined to borrow money to finance their expansion plans. That being said, in a low interest rate environment, even companies that don’t need to borrow may do so because the cost of borrowing is so low. This provides added flexibility for companies and greater potential for investors to experience growth.
An honorable mention to this list is to call your credit card company and see if you can negotiate or lock in a better rate.
Regardless of your financial health and future plans, there are ways to take advantage of today’s low interest rates. Remember that we are unlikely to see such historically low rates again soon — or possibly ever again in our lifetime — so the decisions you make now can positively impact your long-term goals.
The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs.
Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, the Federal Reserve Board, or any government agency. Securities involve investment risks, including possible loss of principal.
Learn more at www.pnc.com.
As a Vice President and an Investment Market Director in the Southeast market for PNC, Justin Sullivan provides investment leadership in the creation and implementation of investment strategies. Justin also serves as an investment adviser for complex accounts. Justin works with a team of investment advisers, specialists in financial and estate planning, trusts and banking services to help clients achieve their financial objectives.
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