Amid the extreme turbulence in financial markets and in people’s everyday lives, the plunge in interest rates that has accompanied the coronavirus pandemic is providing some relief to borrowers.
As the Federal Reserve slashed its benchmark rate to near zero to soften the blows to the economy, 10-year Treasury yields and mortgage rates sank to record lows, prompting a rush for refinancing. Some savings for borrowers also emerged from lower rates on credit cards, auto loans and student loans.
Bottom Line Personal asked four leading loan experts for smart strategies borrowers can use now…
Mortgages
A sharp decline in mortgage rates has created an opportunity for potential home buyers as well as for homeowners seeking to refinance. In March, the average rate sank as low as 3.29% on a 30-year fixed-rate mortgage and 2.77% on a 15-year fixed-rate mortgage. Rates may dip below 3% on 30-year mortgages at some point this year and 2.5% on 15-year mortgages.
To refinance…
Focus on your objectives. First of all, your new rate typically needs to be at least half a percentage point lower than your existing rate to make a refinance worthwhile.
If you just want a lower monthly payment, get a new loan with your original mortgage term but with a lower rate. For most people, that means a 15- or 30-year fixed mortgage. Just remember that a refinance may extend the number of months you have left on the mortgage, so you’ll likely wind up paying more interest over time. Also, consider the closing costs. It takes several years of lower monthly payments to recover up-front costs.
If you need cash, choose a “cash-out” refinance. You may be able to keep monthly payments roughly the same, stretch them over the original length of the mortgage and have tens of thousands of dollars available for pressing needs.
If you have flexibility to pay off your loan quicker, refinance to a shorter-term mortgage, typically going from 30 years to 20 or even 15 years. Your monthly payments may rise, but you’ll pay far less total interest.
To buy a home…
Don’t rush to make a purchase in order to lock in the very lowest rate. For the rest of this year, 30-year mortgage rates are likely to remain low—in the 3% to 3.75% range. And patient buyers may see better prices on homes amid a sharp decrease in demand for homes.
Temporary pause in mortgage payments: The coronavirus economic stabilizaton law offers forbearance—a pause in mortgage payments—to borrowers with federally backed mortgage loans for 180 days initially, plus an option for another 180 days at the borrower’s request. During that period, no interest, fees or penalties accrue. The new law also placed a 60-day moratorium on evictions and foreclosures. Also, owners of multifamily properties with federally backed loans can get forbearance up to 90 days. During that period, they cannot evict tenants for nonpayment of rent. Separately, California and New York announced that various banks and credit unions had adopted programs to suspend mortgage payments for 90 days for individuals affected by the coronavirus. Borrowers should check with their mortgage service providers on what relief is available.
Keith Gumbinger, is a vice president at HSH.com, a mortgage information website.
Credit Cards
Borrowers will see some relief on both new purchases and credit card debt that they already carry. That’s because the average credit card interest rates for consumers with good credit (scores of 700 or higher) are likely to fall to 15.3% for new card offers, down from 18.2% in May 2019, and 15.75% on cards with existing balances, down from 17.4%. Steps to take…
Get a new no-annual-fee credit card that has a history of offering low rates. You’ll need a credit score of 750 or higher to qualify for the best rates. My favorites now: Two cards from American Express have some of the lowest recent rates—as low as 12.99% for both the American Express Cash Magnet card, which gives 1.5% cash-back rewards on all purchases…and its Blue Cash Everyday card, with rewards that range from 3% cash back on supermarket purchases and 2% on gas and department stores to 1% on other purchases.
Consolidate your debt from high-interest cards onto a balance-transfer credit card. My favorites now: Citi Simplicity has a 0% annual percentage rate (APR) for the first 21 months on balance transfers, then a rate as low as 14.74%, with a 5% transfer fee. The Discover it Balance Transfer card has a 0% introductory APR for 18 months on balance transfers, then a rate as low as 13.49% with a 5% transfer fee.
Apply right away. Banks are likely to tighten their lending standards and make it harder to qualify amid concerns about rising defaults as the economy slows drastically and unemployment rises.
Avoid the temptation to make minimal payments just because your card’s rate drops. If you have lingering high-interest balances, a lower APR doesn’t add up to dramatic monthly savings. Example: For a borrower who owes $6,000 and makes payments of just $200 per month, going from a 17.4% APR to a 15.75% saves you less than $10 a month in interest payments over the roughly three-plus years it takes you to pay off the entire balance.
Check whether your credit card issuer offers help if you have trouble making payments. Call for details from major card companies that may be willing to extend payment deadlines…dismiss late fees…and waive finance charges for cash advances.
Matt Schulz, is chief industry analyst with Compare Cards by Lending Tree, a credit card analysis website. CompareCards.com
Auto Loans
You can find rates as low as 0% for some new cars now. If the pandemic sends the economy into a recession, which is likely, inventories of new vehicles will swell and buyers could see more widespread 0% financing deals, which dried up in recent years but accounted for as much as 11% of US auto sales back in 2017.
For the lowest rates, go to automaker websites and check the incentives page. As of April, the lending divisions of several automakers were offering no-interest loans for up to five years on certain models from Ford, Hyundai, Nissan and Toyota…and up to seven years on select vehicles from Fiat-Chrysler and General Motors. You need to be a “well-qualified”
buyer to qualify for these loans, which typically means credit scores of 700 or higher. Also, as of April, many automakers were offering deferred-payment deals on some models—up to 90 days from several automakers to 120 days from GM.
Expect just modest rate drops this year if you get a loan from a bank or credit union because those institutions are factoring in the risk of rising car-loan defaults in a recession. The average interest rate on a 60-month new-car loan is likely to be in the 4% range, down from 4.46% in mid-March…and 4.75% on a 36-month used-car loan, down from 4.95%. Helpful: Go to MyAutoLoan.com to compare the best rates from banks and credit unions.
Greg McBride, CFA, is senior vice president and chief financial analyst for Bankrate.com, which provides analysis and advice on personal finance.
Student Loans
Some borrowers will see dramatically lower rates on government and private student loans than just a year ago. Others may see no change at all.
If you are looking for a federal loan for the 2020–2021 academic year, expect enormous savings. Rates on fixed-rate subsidized Direct Stafford Loans, which are granted based on financial need and are reset each July 1 for the coming year, likely will be about 1.9% versus 4.53% for 2019–2020. Direct Parent PLUS loan rates will be about 4.5%, compared with 7.08% last year.
If you are already paying interest on old federal student loans you’ve taken out in previous years, you won’t feel any impact from interest rate cuts. Older federal student loans cannot be refinanced as new federal loans to obtain a lower interest rate.
Important: The coronavirus economic stabilization law includes a suspension of monthly payments for federal student loans, including Direct Loans, for six months through September 30, 2020. Interest does not accrue during that period. (Borrowers can continue to pay if they want.) Most federal student loan borrowers who suffer financial hardship beyond the six-month period have the option of asking their lenders for “forbearance,” which allows them to suspend or reduce payments for up to an additional 12 months, although interest continues to accrue.
If you have previous education loans, which are funded by banks and other financial institutions and typically charge higher rates than federal loans, consider refinancing. Interest rates on fixed-rate private loans may drop to as low as 1.9% compared with 3.5% a year ago. Helpful: Go to Credible.com to compare the best private student loan rates for refinancing.
Mark Kantrowitz, has been an expert on planning and paying for college for 30 years and is publisher of SavingForCollege.com.