Wes Moss: Use financial jujitsu and lock in rates

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His regular guest post appears here Monday mornings.

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The Japanese martial art of jujitsu is based on using your opponent’s momentum against him. Here’s a great way for you to turn the current economic chaos to your advantage with a bit of financial jujitsu.

There was worry interest rates would start climbing in the wake of the recent downgrade of the U.S. government’s credit rating from the top AAA to the less-than-perfect AA+. That sentiment (in multiple interviews I saw) was based on the logic that if the U.S. government had a “lower credit score” it would have to pay higher interest rates to get a loan, just like every business and person on the planet would have to do.

But last week the U.S. auctioned some $72 billion worth of its now-less-than-perfectly-rated bonds at their lowest interest rate in history, an average yield of 2.13 percent on 3-, 10- and 30-year bonds.

(Treasury bonds are simply interest-paying IOUs from the government. If you bought a 10-year bond last week for $1000, the Treasury will pay you $22 every year for the next decade ($230), at which time it will return your original $1,000.)

So contrary to all the fretting about a downgrade causing interest rates to soar, rates are actually down. Why? First, that’s historically how these things go. Eleven countries have lost their AAA rating in the past 25 years, including Canada, Spain, Australia and Japan. In all but one of those cases, interest rates were lower 12 months after the downgrade.

The same thing will happen here in the U.S., especially in the wake of the Federal Reserve’s recent pledge to keep interest rates as close to zero as possible for the next two years in a bid to fend off another recession.

Here comes the jujitsu. Interest rates may soon be as low as they have ever been in the history of the world. That means the cost of mortgages, credit cards, car loans — any form of borrowing — should push lower this year. 30-year mortgages could dip below 4 percent by the end of this year. So use this historic environment to your advantage. Review every loan you have, and do your best to refinance or re-negotiate for lower rates. If you are thinking of buying a house, get pre-qualified for a mortgage so you are ready to take advantage when you get to the intersection of “right house” and “lowest rate ever.”

The turbulent economy may still inflict some bumps and bruises on your personal finances. But using low interest rates to your advantage will allow you to block some of those blows –- and give you the satisfaction of getting in a few licks of your own.

– By Wes Moss, for Atlanta Bargain Hunter

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3 comments Add your comment

DW

August 15th, 2011
8:47 am

Hare

August 15th, 2011
2:02 pm

The question is, do I do a 15 year mortgage at 3.125% (have higher REQUIRED payments) or a 30 year at 3.375% and make double payments?

Jason

August 16th, 2011
6:11 pm

Personally, I would go with the 15-year mortgage. Yes, you will pay a little more per month, but you are not going to be locked in to 30 years worth of payments. Plus, if the mortgage is assumable, selling the house later on will be very attractive because of the mortgage’s length and low rate.