Any loan can be rethought. Those who refinanced their mortgages last year might find that it pays to try again. Also, take a look at your auto loan; your bank might rewrite it at 8 percent. With the money you save in monthly payments, slash your credit-card debt or build a bigger bank account. Savings interest rates are so low that a cash cache won’t grow by very much unless you put more money in.
Don’t wait for even lower rates. Forecasters come in only two types: those who don’t know where interest rates are heading and those who don’t know that they don’t know. Borrowers should seize the moment. If another moment comes next year, seize it again.
Adjustable-rate mortgages (ARMs) have repaid their believers well. If you fled to fixed rates in 1989, when interest rates rose briefly, you’ve probably refinanced since then, while ARM holders got automatic cuts. If your ARM is coming up for its annual interest-rate adjustment, and your loan is linked to Treasury bills, your new rate will probably be around 6 percent. For “ARM junkies,” who hop to a new ARM every year or two, first-year discounted rates are running around 5 percent. A saving like that often justifies the closing cost.
But even long-time ARM lovers like me are ready to switch to a cheap fixed rate. A 30-year mortgage can be had at (or under) 7.7 percent; 15-year loans go for 7.2 percent. Many banks let you switch for a modest fee. At the Continental Savings Bank in Seattle, for example, you might pay only $100 upfront to convert from an ARM to a fixedrate loan. In return for not charging closing costs, the bank wants a higher interest rate-8 percent on the conversion mortgage versus 7.625 percent on a regular loan.
You can usually refinance if your home is worth at least 10 percent more than the loan amount (or 5 percent more, if you buy private mortgage insurance). Vacation homes need a 30 percent cushion. To keep long-term expenses down, ask for a monthly payment schedule that retires the loan over the same (or shorter) period of time remaining on your present mortgage. If you take a longer loan, you’ll pay much more interest than you intend.
Where variable auto loans are offered, they’ve been winners, too. Liberty National Bank in Louisville, Ky., has a five-year variable at 6.25 percent versus 7.5 percent on a fixed-rate loan. Because auto loans are so much smaller than mortgages, monthly payments don’t rise by very much even when interest rates go up.
A debtor’s heaven is savers’ hell. One-year certificates of deposit are averaging 3.4 percent and money-market mutual funds 2.7 percent. Even the guaranteed minimum rate on new Series EE and Series HH Savings Bonds-until last week, an outstanding 6 percent-was slashed to 4 percent March 1. Savers everywhere are flailing around for higher yields.
But you’ve got to put real-life cash flows first. Everyone needs a ready reserve (the classic “three months’ income” is a bare minimum). Every retiree needs enough safe money to pay the bills for four or five years. The pittance these funds earn is your trade-off for keeping your life secure. Only when you’ve built your safe harbor should you expand into stocks and bonds.
If you find that advice too conservative, ask yourself how you’d manage if half your savings went down the tubes over 22 months, as happened in the 1973-74 stock-market decline. That’s Precambrian to today’s younger investors. They haven’t yet learned (although they will) that the way to outlast such declines is with money in the bank.
Falling rates mean big profits investors in long-term bonds. Taxable bond funds are up 3.1 percent since January, compared with a mere 0.4 percent on general equity funds, reports Lipper Analytical Services. Tax-exempts, in particular, are good buys, says Mark Donohue, bond analyst for the New York brokerage firm Gabriele, Hueglin & Cashman. Every month, billions of dollars’ worth of high-rate bonds from the early 1980s are being recalled, setting off a huge demand for replacement issues. That, plus rising demand from those facing the Clinton tax, means that yields are going even lower, Donohue says.
Mortgage-backed securities are another story, especially the high-yield, 8 percent collateralized mortgage obligations (CMOs) that dazzled so many investors last year. When interest rates drop, homeowners refinance their mortgages. The investors who bought those mortgages get their money back ahead of time. Prepayment is cutting expected yields on some CMOs (by how much, you’ll never learn; brokers rarely know). Even many of the so-called “PAC” CMOs, which were thought to be pretty stable, have been breaking apart. Bottom line, says CMO expert Robert Andres of Martindale Andres & Co., a money-management firm in West Conshohocken, Pa.: individuals shouldn’t risk buying these securities at all.
Mortgage-backed Ginnie Mae securities have also been hurt by the boom in mortgage refinancing, but not as severely as most retail CMOs. In Andres’s judgment, plain old treasuries currently are a better buy, with Ginnie Maes improving by June. And one general reminder: when the bond market romps, stocks usually follow.
