Time to Refinance Your Mortgage?

In the midst of COVID-19 craziness, interest rates on bonds are at all-time lows across the world. This is not good news if you rely on the interest income from your savings but it’s great news if you’re a net borrower — e.g., you have a home mortgage.

The rate on 10-year US Treasury bonds is now ~1%. We’ve come a long way from 1981 when 10-year rates topped out at 16% and mortgage rates neared 20%. Readers of a certain age will remember the runaway inflation fears during the Ford, Carter and Reagan years. Readers of a younger age have no fear of inflation. Times have changed.

More practically, if you currently have a home mortgage, consider refinancing it. Assuming your income, credit score, and equity in your home are sufficient, you’ll likely to find a lower rate and this could amount to a significant savings on your monthly payment. Alternatively, you may want to opt for a shorter-term instead of a smaller monthly payment and pay it off sooner.

Ten-year government bond rates in Switzerland and Germany are negative 0.5%. In those countries, mortgages may have a zero or negative interest rate. Similarly, you may pay a fee to deposit your money in the bank. If you don’t think that’s crazy, then you’re not paying attention.

For those of you with credit card and other unsecured consumer debts, those rates are notoriously slow to adjust downward with other interest rates. Don’t look for big reductions here but instead, focus on paying off those debts as quickly as you can.

The stock market crash has us all a bit spooked but take advantage of these record low mortgage rates. You’ll save some money every month.

PS: after publishing this note, the Fed made an emergency announcement that they’re cutting short-term rates to near 0% and buying government bonds and mortgage-backed securities. This should be another powerful nudge toward lower mortgage rates.

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