How Low Interest Rates Will Impact Your Mortgage, Loans and Credit Cards

Interest rates are so low they could be fodder for a comedy routine. How low are they? So low they make Danny DeVito look like LeBron James. Or, Take my CD rates. Please. But it’s no laughing matter for savers—who are being offered yields little better than what they could get by stuffing money under a mattress—or for those worried that the economy may never respond to the stimulus of rock-bottom rates.

And no joke: Rates could be headed lower still. The Federal Reserve has already announced that short-term interest rates will likely stay near 0% at least through mid 2013. And speculation is that the Fed will soon embark on a mission to push down long-term interest rates by selling short-term securities and using the proceeds to purchase longer-term bonds (or rolling over maturing short-term notes into long-term bonds). Increased demand from the Fed would raise prices for longer-term bonds, lowering their yields and the rates for many of the consumer loans, such as mortgages, that track them.

The last time a Federal Reserve tried such a maneuver, called a “twist,” was in 1961. Much of the move might be priced into the market already. But depending on how the Fed carries out its plan, rates could inch a fraction of a point lower.

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Whether the economy gains any traction remains to be seen. “The lack of cheap credit is not what’s holding back spending,” says Bill Hampel, chief economist for the Credit Union National Association. Rates on 30-year fixed mortgages, for instance, reached a record-low 4.1% in mid September—about the same time that mortgage bankers reported a 5% dip in applications. Some would-be borrowers don’t have the down payment for a house or the equity to refinance a mortgage. Others lack the pristine credit required for the best rates. And for so many these days, debt is a four-letter word.

But borrowers who are able should take advantage of mortgage rates they may not see again. Retirees and pre-retirees can shorten the term of their loans at today’s low rates, but younger borrowers should lock in the cash-flow flexibility of a rock-bottom payment for 30 years, says Garth Scrivner, of StanCorp Investment Advisers, in Albuquerque.

Car loans and balance-transfer credit card offers are also enticing, but read the fine print to see how the rates will change over time. “The danger with borrowing in this type of low-rate environment is that you don’t think about what happens to your loan when rates start to increase,” says Theresa Chen Wan, of Altfest Personal Wealth Management, in New York City.

For savers, it’s better to accept stingy rates for now than to take on greater risk by chasing higher yields. A nearly 3.3% yield on a 30-year Treasury bond might seem juicy, but a one-point rise in rates would wipe out 17% of your investment. Instead, look for the best risk-free rates available at online banks, such as Discover Bank, which is offering 1.1% on savings accounts with a minimum deposit of just $500. Many banks offer higher rates on rewards checking accounts. Consumers Credit Union, in Lake County, Ill., offers 4.09% on up to $10,000 if you complete 12 debit card purchases per month and meet other requirements.