Saving Money in the Era of Record-Low Interest Rates

Despite the predictions of many financial experts, interest rates are continuing to decline throughout the economy. This is not good news for savers, who are having a difficult time finding a conservative investment that provides any decent yield.

Savings accounts are paying under 1 percent while five-year certificates of deposit currently offer a paltry 1.51 percent interest rate. Even 30-year Treasury bonds are only paying 2.45 percent interest. If investors want to overcome the effects of inflation, they are almost forced to invest in higher-risk assets like stocks.

However, bad news for savers is good news for borrowers. Although low interest rates have made it very difficult to earn a decent investment return, they have also driven down the costs of borrowing large sums of money.

For instance, a 30-year fixed-rate mortgage can now be obtained for just 3.54 percent. In addition, a four-year new car loan costs even less – just 3.07 percent.

Simply put, anyone who needs to borrow money for a large purchase should think about doing it very soon. Although the Federal Reserve has publicly declared their intention to keep interest rates low for the next two years, they only have so much control over the direction of rates.

Despite their best efforts, interest rates could quickly spike at any time, which would end a once-in-a-lifetime opportunity to borrow money at rates that may not been seen again for a generation.

Of course, for most people, the largest purchase they will ever make is a house – and real estate is currently a buyer’s market. Not only are interest rates on mortgages at all-time lows, but housing prices have still not recovered from the collapse of the bubble that peaked in 2006.

According to the S&P/Case-Shiller Home Price Indicies, the most comprehensive measure of national real estate prices, housing prices have declined by approximately 34 percent in the past six years.

However, just like interest rates, housing prices may not remain this low for long. In fact, there are some preliminary signs that housing prices may already be starting to rebound. The most recent release of the S&P/Case-Shiller Index showed that home prices actually increased by 1.3 percent in April. In addition, a recent Reuters poll found that most economic experts believe real estate prices will stabilize in 2012 and begin to at least modestly increase in 2013.

Poor economic growth and a surplus of foreclosed homes may prevent these expectations from being realized, but it is difficult to imagine that housing prices could see further dramatic declines in the years ahead. If this turns out to be the case, home buyers would be wise to speed up their timetable for purchasing their dream house.

Thankfully, home buyers are not the only people who can take advantage of these historically low rates; anyone looking to make a major purchase can benefit from cheap borrowing costs. In particular, people who are in the market for a new car can save a lot of money by financing the purchase with a cheap loan.

In fact, it is now a particularly opportune time to buy a new car: With the end of the summer approaching, many dealers are desperate to unload their remaining stock of 2012 car models and will be amenable to more favorable deals to facilitate a sale.

As for people who already have debt, they should do everything possible to lock in these current interest rates. Current homeowners should look into refinancing their mortgages, especially if they have an adjustable-rate mortgage. Recently graduated students should see if they can save money by consolidating their high-interest student loan debts into a single low-cost loan.

In short, borrowers should find any way possible to benefit from these low interest rates while they still exist. In the not-too-distant future, borrowers may not be so lucky.

Comments

  1. I always kick myself because if I had just bought my house five years later I would have been cashing in on some rock bottom prices! I’ve never been a lucky one, though. Sometimes it is all about being in the right place at the right time (and having the money to do something about it).

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