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Keeping Rates Low
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Today, the Federal Reserve decided to keep interest rates at or near one quarter of one per cent. The decision to leave the index alone, namely not increasing it, may seem to some to mean that the government does not have a lot of confidence in the market's economic recovery.
Despite the fact that everyone says it is improving. And, I think it is. But I'm just here to relate this to your personal finances. Specifically, what does this mean for debt?
Well, it means interest rates are making borrowing look all the more attractive! Right?
For instance, most of your basic home equity loans float their interest rates to some margin above the Prime Rate as published by the Wall Street Journal.
This rate is typically three per cent above the Federal Reserve rates mentioned above.
What this means is really quite simple.
Depending on your home's value and the equity in it, you may be able to get an interest rate on a second mortgage of as low as Prime plus zero per cent. Some banks may even entice you with an "introductory rate" of Prime minus one-half of one per cent or even lower.
It boils down to 3.25% (Prime), plus or minus...whatever. This whatever can be based on everything from your credit score to your loan-to-value to your debt-to-income ratios, et cetera.
Some basic definitions:
LOAN TO VALUE simply refers to the ratio of all of your mortgages, say $70,000.00 and your home's value, say for simplicity $100,000.00. In this case the Loan to Value is 70%. If you also had a small second mortgage of $5,000.00 then you would have a COMBINED LOAN TO VALUE of 75%. Bankers will refer to this as your LTV or your CLTV (kissing cousin to the TOTAL LOAN TO VALUE - TLTV).
DEBT TO INCOME ratios are very similar. The debt portion of the ratio is all of your monthly payments. For instance, if you had a car loan ($300), a mortgage ($550), and a student loan ($150), you would have monthly debt payments of $1,000. If you made $24,000 a year (before taxes), you would have a monthly income of $2,000 and a debt to income ratio (DTI) of 50%.
Obviously, the lower of each of these, the better rates you will be offered. A final, major consideration, would be your credit score. A credit score is a really quick way of telling a bank how likely you are to make your payments. It's a complicated formula that takes into account the number of debts you have or have had in the recent past (typically seven years), the balances on the debts, the types of debt, the length of time the accounts have been opened, and the like.
The point of all of this is to say, first of all, just because interest rates are low does NOT mean you should be jumping to take out some equity in your home. I have heard many financial teachers informing people that they MUST take out a mortgage RIGHT NOW as rates are at HISTORICAL lows and this is a GREAT time to be borrowing money and making money off of that money!
It's a disturbing thought, really.
Consider instead, working hard, saving and spending wisely, giving and paying off your debts early. Who cares how low the rates get? Who needs it?!
