Cash is a wonderful thing. It may be true that it can’t buy love or happiness, but it sure is useful when it comes to groceries, gasoline and mortgage payments.
Real median household income, says the Census Bureau, reached $51,939 in 2013. That’s 8 percent less than households earned in 2007, one year before the recession and housing market crash.
Not only has income gone down, but expenses have increased at the same time. Some of the higher prices we see are actually a result of inflation. For instance, the Bureau of Labor Statistics tells us that to have the same buying power as a 1999 household would today require annual earnings of $75,040.62.
I bring this up because interest rates are in the dumper. This is bad news if you save money and expect your savings to generate a sensible return and not the less than 2 percent or so that a 5-year CD now pays. Alternatively, today’s low rates are good news if you borrow.
Along with rates for just about everything, mortgage interest levels are the lowest in years. Freddie Mac recently reported that 30-year fixed-rate mortgages were priced at 3.91 percent.
I saw the Freddie Mac number and re-read it several times. It looked like a typo.
But the truth is actually more interesting. Interest rates could go lower and that gets us to the bet we all make: Is now the time to finance or refinance a VA mortgage or should we wait for even lower rates?
There was a time during the Great Depression when Treasury securities had negative interest. In other words, if you bought T-bills worth $1,000 you got back less than you put in. This was not a gamble; buyers knew up front that they would get less but the alternatives were so miserable that a little negative interest was a good deal in exchange for the safety of government paper.
A Great Time to Finance
Right now banks are able to borrow at rates ranging from 0 percent to a lofty .25 percent. And if you have a lot of cash to deposit, say $50 million or so, the Wall Street Journal says at least one bank may charge you money for the privilege as a way to combat new regulations and low interest rates.
I have no idea where rates will go, when we’ll hit bottom or if we already have. But I do have a personal preference: It seems that with the lowest rates in years, now is a good time to finance and refinance with a fixed-rate loan. Yes, 5-year adjustable rate mortgages are cheaper but we don’t know where rates will be in five years — and as we know from the government there’s no assurance that incomes or buying power will rise.
If you lock-in financing today and rates go significantly down then it may make sense to refinance. If interest levels rise then no problem, your rate won’t change.
That’s the beauty — and comfort — of fixed-rate financing.