Is Refinancing When You Have Bad Credit a Good Idea?

1. There is a fight, a tug-of-war if you will, in between savers and customers in this nation. Savers Lament On the saver's side, conditions are horrific. Rates of interest on certificates of deposit (CD) have actually dropped substantially to the point where the average rate for a 1-year CD is 0.55% and simply 1.63% for a 5-y CD. Review that for a bit ... your cash locked-up for 5 years making just 1.63%! Other savings vehicles are struggling too. For instance, a popular fund which contains business bonds from Wells Fargo, AT&T, Wal-Mart, and other blue-chip American companies has a typical maturity of 12 years and currently yields about 3.75%. That's 3.75% of taxable interest earnings. Assuming your tax rate is 33%, you're entrusted to an efficient, after-tax yield of 2.5% which, my good friend, is less than the historic inflation average of 3%. So, while your bond investment is better than money in the bank and safeguards you to some extent against inflation, you still end up with 0.5% lower purchasing power every year. So savers can't be too delighted about this. While Debtors Rejoice Debtors, on the other hand, are having the time of their lives. Recently, the average 30-year fixed-rate mortgage hit its all-time low of 4.19%. The kicker here is that home loan rates must in fact be more than 0.5% lower - in the 3.8% variety - based on their connection with rate of interest on Treasury bonds. Nevertheless, rates are not likely to go much lower so here's an idea: If you are in the market to re-finance, waiting is probably not going to assist you much. Additionally, clients of mine are borrowing millions at 2.15% to money their service activities. Appears a Little Unfair Without taking a moral stance, it does appear a bit unfair that savers, who in a sense are the "good guys" building wealth for their future, contributing capital for economic development and conserving for a rainy day, are being penalized for the actions of reckless borrowers and greedy lending institutions. Debtors got in over their heads, didn't take affordable safety measures, and are now getting loan modifications and decreased rates on the money they owe. Banks experienced enormous losses since of bad loaning practices and triggered this drop in rates to ultra-low levels. However, this sort of discussion does not get us anywhere. What has taken place, has actually happened - fair or unreasonable.

2. So where do we go from here, and how do we profit from all this? What Borrowers Can Do Take a look at your finances from a customer's viewpoint. First: re-finance your mortgage NOW if you can because rates most likely aren't going to fall much lower. 2nd: store, shop, shop for a much better rate on your charge card. Loaning expenses are dropping all around so why should you pay the usual high rate on your charge card? Find banks that are starving to lend you money such as smaller sized organizations and Credit Unions, and avoid mega-banks that normally have all the cash they need. Third: take out a service loan if you need the money. Banks are chilling out and making loans at relatively low rates that are extremely compelling regardless of the danger of slower service in this weak economy. Nevertheless, utilize common sense and profundity as you handle more financial obligation. Take on "good" debt that funds your house purchase or properties that value in value. Stay away from handling "bad" debt for diminishing possessions you can ill afford such as a brand-new car or boat. If you must handle "bad" debt, make sure it is short term and pay it off very rapidly. What Savers Can Do Now the difficult part: discovering deals as a saver. First: look for a longer-term CD that will change higher if rates increase. There is little bit even worse than locking your money in a 5-year CD at 1.50% just to see rates rise to 5% 2 years from now. 2nd: think about purchasing business bonds with maturities of 5 years milebrook.com or less. These bonds still yield more than CDs, but make sure you understand what you are buying - if the corporation goes bankrupt, you might lose a great portion of your "safe" investment. Third: think about purchasing high dividend-paying blue-chip stocks. Warren Buffet just recently stated that stocks are more affordable than bonds today, and he's right. There are lots of strong business out there whose dividend yields are above 3%. For instance, Altria currently has a dividend yield of 6% and a solid history of constant dividend payments. So ... it depends on you to be a winner or loser in the cost savings and borrowing video game. All you have to do is know the truths, decide to act, get on the phone or in your automobile, and begin getting your affairs in order.