Taking Advantage of Today’s Low Interest Rate Environment
As a result of the coronavirus pandemic and associated economic shutdown, the Federal Reserve has continued its course of accommodative monetary policy. In March, it cut its benchmark interest rate to 0.0% – 0.25%. While this has provided some challenges for savers and more risk-averse investors, it can present some beneficial opportunities as well.
With rates near historic lows, here are some ways in which you might benefit from current monetary policy:
Mortgages
The most significant form of household debt is a mortgage. As a result, one of the single greatest benefits of low interest rates is the ability to refinance an existing mortgage or take out a new mortgage at a low interest rate. Additionally, a Home Equity Line of Credit (HELOC) allows for flexible borrowing and repayments.
While conforming loans are currently offering very attractive rates, the jumbo loan market (those loans in excess of roughly $510,400 in most counties established by the FHA and $625,000 in many major cities) has been slower to adjust to lower rates. Perhaps because lenders are worried about new loans they originate being refinanced again soon afterward, lenders have started offering greater benefits to consumers willing to “pay points up front” on their loan. Historically, consumers could expect a 0.25% reduction in their fixed rate mortgage for every point paid up front. More recently, many lenders are offering greater reductions in excess of that 0.25% for each point paid up front so as to receive more interest on the loan immediately given the uncertainty of current conditions.
Margin Borrowing
Borrowing on your brokerage account is a convenient and quick way to repetitively borrow and repay on a flexible basis. There are no loan documents or maturity dates. To avoid bounced brokerage account checks or to avoid capital gains from selling assets, borrowing on margin can be an attractive feature to add to any taxable brokerage account. WESCAP has been able to negotiate competitive margin rates for our clients, often lower than the interest rates available from traditional mortgage sources.
Consolidate Debt
Much like mortgages, other loans can also be refinanced or consolidated. Many consumers may find that they have other loans such as auto loans, credit card debt, margin loans, lines of credit, or college loans. All of these loans carry different, and sometimes substantial, rates of interest. By consolidating or renegotiating this debt, you may be able to significantly reduce your monthly obligations.
Series I Savings Bonds
Also referred to simply as I Bonds, these are an alternative option to money market funds, CDs or Treasury Bills and Notes. It is important to note that the maximum purchase for I Bonds is $10,000 per person, per calendar year. I Bonds are savings bonds that earns interest based on combining a fixed rate of interest and an inflationary rate. The fixed rate remains the same throughout the life of the bond. The variable inflation rate is calculated twice a year and is based on the changes in the Consumer Price Index (CPI). These bonds provide low risk to a portfolio while protecting your savings from inflation. For bonds issued from May 2020 through October 2020, the combined rate is 1.06%.
To discuss any of this further or for specific questions regarding your current situation, please do not hesitate to reach out to your WESCAP Advisor.
Sincerely,
Your WESCAP Team