Refinance, Pay Down Debt While Interest Rates are Low
Right now, interest rates are near record lows. The Fed funds rate is extremely low right now. The Fed has made noises about a new benchmark, rather than the Fed funds rate, but either way, things could be changing toward the end of 2010 and the beginning of 2011. Last quarter’s GDP data made it clear that the economy is starting to grow — even though unemployment remains an issue. Gather Little By Little offers this observation on GDP and inflation:
However, if the GDP keeps going up, inflation will surely come back sooner or later. Unfortunately, the best way to stop inflation is to increase the intraday interest rate. By doing so, all interest rates go up and this motivates (read: forces) consumers to spend less and concentrate on their mortgage loan and other debt. This is how the FED can slow down the consumption and inflation at the same time.
This means that the Fed is going to probably raise rates, either the Fed funds rate or use some other means to control inflation, at some point toward the end of the year. While this does not have a direct effect on fixed mortgage rates (which are tied more closely to the 10-year Treasury note), it can have an immediate effect on variable mortgage rates and on the rate you pay for revolving debt. And, eventually, as the economy heats up, investors will move toward riskier assets and out of Treasuries, forcing yields higher — and even fixed mortgage rates will rise.
This means that 2010 might be a good year to get your financial house in order. It is probably a good year to refinance, and it is definitely a good time to pay down debt. With interest rates low, you can save money on your mortgage interest when you refinance, and with rates low more of your revolving debt payment goes to the principal. If you want to save money on your debt, it is best to do what you can before 2010 draws to a close. Make your plan now.



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