Interest Rates: The Good, The Bad, The Ugly

As I’ve mentioned here before, the super-low interest rates we have now are a big problem for those living on their investments. This can be especially problematic for those who avoid stocks. No matter how often I espouse the benefits of having a decent amount of stocks in a retirement portfolio, many people stick with bonds, CDs, and fixed annuities in their retirement accounts. The periodic double-digit percentage drops are too much for them to handle. But now it may be the interest rates that cause the most heartburn.

Back in the day (which really wasn’t all that long ago), you could get 4-5% on a money market fund, 6-8% on solid corporate bonds, and correspondingly good rates on other fixed income securities. As you well know, that’s not the case any more. Those who got used to living on those income streams have seen their cash flow diminish over the last many years. But one person’s problem is another person’s opportunity.

The Federal Reserve is doing everything it can to keep interest rates low, not to punish savers (though that happens), but to help people borrow, and subsequently spend, money. And while I generally don’t encourage people to take on a lot of debt, one major source of debt, housing, lends itself to positive results when handled correctly.

Now, I don’t think that everyone should own a house. But for many it is a good long-term investment that produces many standard-of-living advantages. If you’ve decided that home ownership is right (and affordable) for you, then the Federal Reserve is definitely your friend.

When I bought my first house, the loan was at 14.5% interest. I know what you are thinking—but no, I had great credit. It’s just at that time the Federal Reserve was trying to slow down the economy, not speed it up, and making loans hard to afford was a great way to do that. Today it seems that interest rates have always been in the low single-digits. Mark my words that will change; though I’m not predicting when.

While rates are down to what are essentially historical lows, you can afford more house, or you can afford the same house and have money left over for other things. If you already have a mortgage, you can refinance it and either pay off your house quicker or have more money to shift to other needs (Might I suggest retirement savings?).

The even lower payment for adjustable-rate mortgages may be appealing, but unless you are sure you’ll be leaving the area in a few years, I still prefer fixed-rate loans. I’m willing to pay a bit more to get more certainty with such a large cash-flow item as a house.

Strive to keep your borrowing cost down, but if it makes sense, 2013 is a great time to be in debt.

 
This article was published under the title "Low Rates good time for debt" in the Wichita Falls Times Record News on February 24, 2013.