Daily Gains Letter

Make the Fed’s Monetary Policy Work for You

By for Daily Gains Letter |

040313_DL_zulfiqarDuring the financial crisis, when the banking system was on the verge of collapse, the Federal Reserve came to the rescue. As a result, the central bank ended up reducing interest rates in the U.S. economy to the historical low level.

The reasoning behind this was very simple: the financial system needed liquidity—and the banks weren’t lending to anyone.

On one hand, the argument for these actions by the Federal Reserve was that when interest rates go down, businesses and consumers alike will be more prone to borrowing, because it simply costs them less to owe money. This phenomenon has its own implication—when businesses and consumers borrow, they spend money, and from there, economic growth kicks in and so on and so forth.

On the other hand, these activities by the Federal Reserve were not well received. Those who opposed the Fed’s policies reasoned that it was a short-term fix, which doesn’t do much in the long haul. In addition, they argued that the banks were the only ones who took advantage of this.

While both arguments have their backing, in the midst of it all, these actions had—and, as a matter of fact, they still have—a silver lining for those who are planning for retirement or simply looking for ways to save more money or cut expenses. One way you can take advantage of the Federal Reserve policy is to refinance your mortgage.

Refinancing Your Mortgage

As the Federal Reserve slashed interest rates to boost economic growth, the mortgage rates offered by the banks also decreased. In January of 2013, the conventional 30-year fixed-rate mortgage in the U.S. economy reached its lowest mark—3.41%. Before the housing slump, and the financial crisis, these same mortgage rates were well above six percent. Just to give you some idea, since January of 2006 to now, 30-year fixed mortgage rates have fallen more than 44%—they fell 6.2% in January of 2006 alone. (Source: Federal Reserve Bank of St. Louis web site, last accessed February 28, 2013.)

In this situation, persons planning for retirement or looking for ways to save money can refinance the mortgage they have. In other words, look to replace the old terms on your mortgage with new and better terms.

For example, if someone has a mortgage of $150,000 on their home with 16 years remaining at the rate of 6.5%, by refinancing at 3.4%, not only will their monthly payments decrease significantly, but over the lifetime of the mortgage, they will pay a lower amount of total interest on the amount borrowed. (Source: “Refinancing Calculator,” MSN Money, last accessed February 28, 2013.)

Pitfalls in Refinancing Mortgage

With a lower rate, if a person is looking to refinance their house, they must watch out for factors such as the penalty charged for refinancing their home. In addition, they should also ask about any other added costs—lenders may charge a higher loan origination fee or other administrative charges. Furthermore, it may be wise to find out if the lender will penalize the homeowner if they try to make extra payments.

With all this said, retirement planning is a long-term process; by making smaller changes over a long period of time, you can significantly increase your odds of having a good retirement income. Refinancing your mortgage when the mortgage rates are low is just one way to raise your retirement savings.

If a person is able to refinance their mortgage, they should take advantage of the lower monthly payment—make these lower payments work for you. There are a few things you can do with the money you’re saving on your monthly payments, including paying off any debt you might have with a higher interest rate, or simply investing money into a stock that gives out a dividend and has a great track record for increasing value for shareholders.

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