The Federal Reserve's announcement last week that it would hold interest rates at the current near-historic lows until the unemployment rate retreats to 6.5% — a figure most analysts expect won't be reached until at least the end of 2015 — holds some interesting options for consumers.
Though the decision is bad news for savers, it’s financial news you can use to your advantage when it comes to building your long-term financial health. Here are four ways to make the lasting low interest rates work for you:
1. Set a two-year goal
The Fed's announcement that interest rates will be held low for at least the next three years allows you to work toward raising your credit score to eventually gain eligibility to competitive loan options to help make a home purchase, refinance, home improvement or small business loan truly affordable.
Though you’re legally entitled to a free credit report once a year, your FICO score typically isn’t included free of charge. However, it’s what you should know in order to set clear benchmarks to credit improvement.
FICO scores can be purchased, but Credit Sesame also offers a free credit monitoring service that allows your to view your Experian National Equivalency Score (which is frequently used by commercial lenders), free of charge, at any given time.
Consider the amount of money you can save by patiently working to boost your credit score: In the case of a hypothetical 30-year fixed, $250,000 loan, a person with a 760 score would qualify for an interest rate that is half a point lower than a person with a score of 699.Over the life of the loan, that seemingly unimportant 61point difference amounts to about $20,000.
Start monitoring the movement of your credit score, aiming to get above 720, and ideally, as close to 850 as possible, to access the best loans on the market.
2. Stop feeling pressure to buy
Not all mortgage lenders require a full 20% down payment on a home — but they’ll make you pay for not doing so in the form of private mortgage insurance (PMI). Though the exact PMI amount depends on the loan specifics, it’s typically 2.25% of the loan amount.
Knowing that interest rates will remain low gives you peace of mind to ignore the marketing and media coverage that pressures you into thinking you’ll miss out if you don’t act now.
Home inventories are solid, and prices aren’t increasing rapidly. Save a solid down payment, and avoid paying unnecessary costs that many rushed home buyers assume wrongly believe are part of buying a home.
3. Rethink the meaning of traditional mortgage
The Mortgage Bankers Association reports that 61% of home loans made in September 2012 were 30-year fixed-rate mortgages, a typically popular loan product due to the affordable low monthly payment commitments.
Low home prices and low interest rates present an opportunity to achieve the real American dream: Owning the home you live in. By taking on a shorter loan term, like a 15-year mortgage, your monthly payments will indeed be about 30% higher each month, according to Gregg Busch, vice president of First Savings Mortgage Corp.
Taking advantage of low interest rates with a shorter loan term primes you to build equity and achieve greater liquidity when interest rates eventually rise.
4. Don’t expect savings to save you
Most financial experts recommend having at least three to six months worth of your income saved in an interest-bearing deposit account, so make saving a priority up to that amount — and then move onto more “profitable” ventures with the potential to earn beyond 1%.
The Fed's commitment to low interest rates is ultimately about fueling the economy when inflation is manageable. Its key intent is to stimulate consumers and investors out of fear mode and induce them to ease money out of low-yielding bonds, and into stocks.When you can plan for this shift in investor ideology, you’re also poised to buy low, and sell higher.
Elle Kaplan, CEO of Lexion Capital Management, says that the key to this strategy is remembering that the root ideology — regardless of how much money your stock picks make.
“The most common mistake [investors make] is the natural inclination to buy more of a success. Resist the temptation to buy more of something when it has already gone up a great deal. Instead, diversify and buy out of favor asset classes that are still primed to go up,” says Kaplan.