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What do interest-rate lows mean for borrowers?
NEW YORK |
NEW YORK (Reuters) - As the stock market plummeted yet again on Thursday, interest rates on 10-year Treasury notes dipped below 2 percent to the lowest levels in 70 years.
For traders, Treasuries represented an obvious safe haven from stocks, and the frenzied buying drove down the yield.
But what does that mean for you? It could very well spark a borrowing bonanza for consumers, especially in the mortgage market.
"It's a good time to be on the buyer's side of the credit equation," says John Ulzheimer, president of consumer education at SmartCredit.com.
While Ulzheimer says "historic lows" is a tired and overused term, he's still amazed by what's going on now. "In all my years in this business, I've never seen mortgage rates at 3.75 percent," he says.
However, those ultra-low rates are only available to borrowers with stellar credit scores of around 750 and up. "For somebody who is unemployed or under-employed or upside down on their house, there is no way for them to take advantage of these rates," Ulzheimer says.
And that may explain why, despite plunging rates, new mortgage and refinancing loan volumes fell nearly 19 percent, to $265 billion, at the end of the second quarter, down from $325 billion in the first quarter, the lowest since 2008, according to Inside Mortgage Finance.
The conundrum for consumers interested in refinancing is that it's hard to actually take advantage of these new low rates. "You can't get anyone to answer the phone. And by time anyone gets back to you, rates are higher," says Guy Cecala, publisher of Inside Mortgage Finance.
Here is how a low Treasury yield affects various private borrowing options:
Fixed-rate 30-year mortgages are typically priced at two percentage points over 10-year Treasuries - and with the recent drop, consumers can expect to see rates hit new all-time lows.
The all-time low for 30-year-fixed rate mortgages was 4.15 percent, reached in 1971, according to Freddie Mac. "If we surveyed (lenders) today, we'd probably be closer to 4 percent," Cecala says. (Rates were lower in the 1950, but 30-year loans were not widely available.)
Retail lenders, such as major banks, "tend to be most bureaucratic and slowest. They are hard to catch in this kind of environment," Cecala says. He recommends working with a mortgage banker or a smaller company that sells loans to large banks.
Sometimes you simply need to play hardball with lenders. Ken McDonnell, director of the American Savings Education Council with the Employee Benefit Research Institute, recently refinanced his mortgage. After researching online, he contacted a number of lenders in his area and approached his mortgage holder with the best offer he found.
"I contacted Bank of America, who was my mortgage banker for the past 13 years, and told them the rate I'm getting from Aurora Financial - 3.6 percent and $3,000 in closing costs - and asked could they match it or do better and they didn't," he says.
By switching lenders, McDonnell reduced his rate from 4.5 percent to 3.6 percent, which saves him $291 on his monthly mortgage payment.
If you're seeing those 4-percent mortgages and wondering why your credit card interest rate is still in the double-digits, don't count on any relief from these historical lows on Treasurys. Ulzheimer says. Credit card rates are largely tied to the prime rate. "The credit card environment has had so many monumental events over the past three years that rates are going to stay where they are right now," he says. The best rates are going to be around 7.9 percent - even though for any other type of credit that would be a bad rate - and the average rate is between 14 and 15 percent.
Car loans, however, are also expected to hit historic lows. The biggest factor affecting rates right now, Ulzheimer says, is your own credit score. "A credit score of 750 buys you 4.3 percent rate on an auto loan, but a 580 gets you 17 percent for same exact car. So you're paying $170 more per month, for a $20,000 loan just because you have poor credit."
As with mortgages, it also really pays to shop around on car loans. "The average rate is 5.5 percent, but you can find rates in the 3-percent range," says Greg McBride, senior financial analyst at bankrate.com.
The only issues that have popped up with student loans in relation to Treasuries is whether to choose fixed- or variable-rate loans for private loans, Ulzheimer says. "While tempting, variable is not a better decision, because you don't know what the rate is going to be over the 4 or 5 years you're in school," he says.
Federal student loans have had fixed rates since July 1, 2006. Very few borrowers should still have variable rate loans from before July 1, 2006 that have not yet been consolidated, says Mark Kantrowitz, publisher of Fastweb.com and FinAid.org
However, private student loan borrowers risk significant increases in their monthly loan payments with variable rates, Kantrowitz says. There's no simple rule of thumb, but a 1 percent increase in interest rates will typically yield about a 5 percent increase in the monthly loan payments on a 10-year term, 9 percent on a 20-year term and 12 percent on a 30-year term, he says.
So unless a student or parent has excellent credit and is capable of repaying the private student loan in full within a few years and fully intends to do so, they are better off taking a federal loan first, Kantrowitz says.
CASH AND CDS
Unfortunately for consumers who want to stay in the safety of cash, rates aren't going to go up any time soon. But you can get some better yields by shopping around. "The average five-year CD yield is 1.45 percent, but the top yield is 2.4 percent," says McBride. But that's as good as it gets for now. "You have to take what the market is giving you," he adds. "Your only alternative is to venture into riskier ventures."
(Additional reporting by Ashleigh Patterson in Toronto.)
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