Estate and mortgageRealty Viewpoint: Consumers Should Use Low Rates To Outsmart Banks
U.S. and world stock markets have plummeted on fears that the U.S. economy is in recession. But is that the worst thing that could happen? When prices recede, that opens opportunity to buyers, making the outlook for stocks and housing suddenly rosier.
This is not a period that is going to reward saving money. When interest rates go down, that"s favorable for borrowing, not for stashing cash.
But you have to have the cash to take advantage and the whole world knows we don"t have it. So we have to artificially flood consumers with more cash by lowering borrowing rates. If they"re smart, they won"t take the bait. Consumers, who typically spend more than their disposable income, should take this period as a gift. They should pay down their credit cards and refinance their mortgages as fast as they can.
Here"s why. When the Federal Reserve lowered target borrowing rates -- that"s the Fed"s recommended rate that federally insured banks borrow from each other -- it impacted consumers immediately in a number of ways.
First, short-term borrowing rates immediately improved on credit cards, equity lines of credit, and car loans.
Now"s the time to call your credit card company and negotiate a lower interest rate. Tell them -- either they lower their rate, or you"ll consolidate your cards and pay them off. That"s not what they want to hear.
But be smart about it. Don"t reload. Take advantage of lower rates to pay down more principal, so you can get out of debt more quickly.
Second, mortgage interest rates are coming down, and are at 2002 lows. If you have an adjustable rate loan, refinance into a low fixed-rate. If you are thinking of buying a home, talk to your mortgage lender and let him or her run your credit report. He or she will tell you whether or not it"s smart to consolidate your credit cards. You"ll also learn how much you should put aside for a down payment, and how much of your disposable income should go toward debt retirement.
Mass refinancings at attractive rates will keep defaults lower and make it more attractive for homeowners to stay put, which in turn, will improve inventories.
Third, even though the stock market has lost its momentum, it"s much closer to a bottom than it was when the DOW was at 14,000 points. That could be a buying signal for some, so if you are funding a 401K or IRA, now"s the time to fund them to the limit. You may see more loss on the stock market, but your buying in at lower prices should average out in your favor over time.
Now"s the time to think long term. If you haven"t been in a good financial position, you won"t find a better time to fix your mistakes and improve your situation.
Things will only get more expensive from here. If others take advantage en masse, that will help put a floor under the stock market and the housing market, and you"ll soon find prices going up again.