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By MICHAEL BATEMAN
Question: My focus always has been on paying off my bills and building up my savings account. With interest rates being so low, should I consolidate bills or just pay them off one at a time?
Answer: According to the latest news from the financial world, interest rates likely will remain at near record lows for the next two years as the Federal Reserve continues to try to help stimulate the national economy.
While the low interest rate environment doesn’t always benefit savers, it is a great opportunity for many consumers to drastically reduce their debt by consolidating and re-financing existing loans to lower rates.
During periods of low-interest, financial experts traditionally have advised consumers to pay off debts and/or consider making major purchases.
For example, a vehicle owner might be better served paying off a car loan that has an 8 percent APR (annual percentage rate) rather than holding that money in a savings account returning a one percent or less APY (annual percentage yield), said Eleanor Blayney, consumer advocate with the Washington, D.C.-based Certified Financial Planner Board of Standards Inc.
Also, it’s normally a good idea to consolidate several higher interest rate loan balances into one loan at a lower interest rate. “Refinancing debt in this low interest rate environment may be a smart move for many people trying to manage their finances more efficiently,” said National Association of Federal Credit Unions President and CEO Fred R. Becker Jr. “And credit unions offer some of the best rates around.”
For homeowners, now is still a good time to re-finance their mortgages. Even if you’ve re-financed just a few years ago, if you can reduce your APR by one percentage point or more, you should consider re-financing again. By re-financing a mortgage, borrowers also might be able to convert from an adjustable-rate loan to a fixed-rate mortgage. Converting also is beneficial if you plan to remain in the house beyond the original mortgage adjustment period.
A homeowner who took out a 7 percent APR, 30-year mortgage to buy a $225,000 house five years ago already has paid about $86,000 in interest. Refinancing at a 3.5 percent rate with a 15-year mortgage will save almost $170,000 over the life of the loan and shave off almost 10 years of payments while only adding $18 per month to the mortgage payment.
A home equity line of credit is another way to consolidate debts, make home improvements, pay for a large purchase or borrow for educational expenses. By borrowing against the equity in your home, you can take advantage of historic low interest rates, in some cases, and the interest you repay is usually tax deductible; however, you should check with your tax adviser.
Making a large purchase, even without a home equity loan, is a good idea if you have a good credit record and can repay the loan within the term, Blayney said. Before applying for any loan or credit card, check your credit reports and know your credit score. You should remove any errors you find from your credit reports. Also, paying bills on time and paying down outstanding balances on current loans often can improve your credit score, if you think it’s too low.
Consider transferring outstanding balances of several different credit cards to one credit card with the lowest interest rate. Also look for credit cards that offer additional perks, such as cash rebates on purchases or air travel miles.
Again, a low interest rate on a loan means money you borrow is at a bargain price. Taking advantage of low rates to re-finance higher rate loans will save you money both on the total amount you repay as well as your monthly payments.
Before considering any re-financing option, consult with a trusted financial adviser or your primary financial institution.
Michael Bateman is vice president of marketing at Fort Knox Federal Credit Union.
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