Super-Low Mortgage Rates Mean A Great Time To Re-Fi

Although the economy is hurting, in many crises there are hidden bright spots. While many businesses are operating on life support, certain sectors of the economy are being boosted by the current economic situation. One of these is the mortgage industry.

The mortgage industry is benefitting from very low-interest rates, which help to fuel demand for new loans. CNBC reports that the average interest rate for a 30-year fixed-rate loan has declined to 3.30 percent. The Federal Reserve cut interest rates to zero in mid-March in an effort to help boost the economy.

As a result of the dropping rates, mortgage applications are up 21 percent over last year. Almost two-thirds of the new loan applications are for refinances of existing loans rather than new purchases. Since many Americans have been laid off, furloughed, or have otherwise lost income due to the Coronavirus pandemic, a mortgage refinance is an alternative way to improve cash flow.

The growing popularity of refinances does not mean that the real estate sales market is tanking, however. So far, residential real estate prices 9have weathered the storm even as house listings have increased per MarketWatch. The reason is that surging demand has propped up real estate values.

HousingWire reported that seasonally adjusted demand for houses was 25 percent above pre-pandemic levels. High demand has led to bidding wars and nearly half of new listings are sold within 14 days.

The pandemic may have lasting effects on the real estate market, however. After a firsthand look at the risks of contagion within urban areas, homebuyers seem to be trending toward rural and suburban homes. City homes are currently spending more time on the market before a sale than their country cousins.

I was one of the many Americans to take advantage of low interest rates to refinance our mortgage over the past few months. Even though we had only been in our home for about two years, we took advantage of the low rates. This was made possible by the fact that home values had not declined as the economy faltered.

If you are thinking about refinancing your mortgage, there are a few factors to consider. If you have a high interest rate or an adjustable rate mortgage (ARM) and you also have good credit and stable income, this could be a great time to save money with a refinance. As a rule of thumb, if you can save more than one point on your interest rate and plan to stay in your home five years or longer, you could benefit from a refinance.

In our case, we got a new interest rate that is 1.5 points lower than our old one. The new, lower payment will offset the closing costs of the loan in about two years.

If you need extra money and have equity in your house, you can also use a refinance to pay off other debts or get cash out. I would recommend proceeding cautiously with these options, however, since you lose equity and may put your home at greater risk if you lose your job. Less equity also means that your home may be more difficult to sell, especially if home values start to decline.

If you’re interested in a refinance but need to clean up your credit or build more of a work history, you may not have to hurry. Interest rates are currently at record lows, but they may not return to normal for a while. Most members of the Fed say that they don’t plan on raising rates until 2023.

Originally published on The Resurgent

News You Can Use: Your Credit Limit May Be Lowered Without Warning… Thanks To COVID-19

If you are one of the millions of Americans who carry a balance on your credit cards, you may be about to experience a credit crunch. Many credit card companies are preemptively lowering credit limits due to the growing financial crisis, often with little or no warning.

CNBC reports that credit card issuers are tightening up on lending as millions of Americans lose their jobs and find their income cut from loss of hours. Many of the changes to credit card terms require notification periods but credit limits can be changed instantly.

“We knew the purge was going to come at some point, but it looks like it may have started,” said Matt Schulz, chief credit analyst at LendingTree.

The reason for the changes is two-fold. First, banks have less money to lend in the midst of the financial crunch. Second, borrowers have less money to repay loans and are at a higher risk of becoming delinquent.

The changes have several important implications for credit card users. The most obvious is that if you tend to carry large balances on your cards, you may find that you do not have any available credit. In the case of someone trying to use credit cards to replace lost income, credit card spending could quickly screech to a halt.

Less clear to most consumers is the effect that a lower credit limit will have on your credit rating. One of the calculations that goes into a credit score is the debt-to-limit ratio. This ratio assesses total debt in proportion to the total credit limit. If your credit limit is reduced, you’ll have a higher debt-to-limit ratio with the same amount of debt that you owed before.

For example, if you had a $10,000 credit limit and owed $1,000, your debt-to-limit ratio would be 10 percent. If your credit limit was reduced to $5,000, the same amount of debt would represent a 20 percent debt ratio.

Generally, you should try to keep your debt-to-limit ratio below 30 percent. If it goes higher, your credit score may drop and creditors may increase your interest rates or deny you new loans.

Obviously, the best way to handle the situation is to not carry balances on your credit card and keep debt to a minimum. However, in the midst of a financial crisis may be too late for some to adopt a strategy of paying down debt.

Another possible course of action is to contact the bank and asking them to reverse the decision to lower your credit limit. Additionally, it might be possible to open a second credit card and transfer part of the balance. This would allow you to keep the debt ratio low.

CNBC also points out that many banks are offering assistance to borrowers who are unable to pay their bills due to the pandemic. Don’t just stop making payments, however. To qualify, you must contact your bank and ask for help. Participating banks may allow borrowers to skip payments or pay less, but be aware that interest and fees may be accruing, putting you deeper into debt.

As with any debt crisis, the first step in getting yourself out of the hole is to stop digging. If you can afford to do so, now is a fantastic time to stop financing your lifestyle with credit card debt. If you can start paying your debt down now, you’ll be in a better position if and when the financial crisis impacts your family.

Originally published on The Resurgent

Bernie And AOC Team Up To Attack Credit Cards

An epidemic of economic illiteracy seems to have inflicted both parties. While Republicans suffer from President Trump’s fixation on taxing imports to make America great again, Democrats, eager to prove that they also fail to understand basic economic principles, have unveiled a proposal for price controls on credit cards.

The proposal is the brainchild of the Democratic Party’s two leading democratic socialists, Sen. Bernie Sanders (D-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) and is targeted at what the pair call “exorbitant credit-card interest rates” in a statement. Their “Loan Shark Prevention Act” would a 15-percent federal cap on interest rates and empower individual states to establish lower limits.

Channeling Ron Paul’s references to “banksters,” Sanders said, “The reality is that today’s modern-day loan sharks are no longer lurking on street corners breaking kneecaps to collect their payments. They wear three-piece suits and work on Wall Street, where they make hundreds of millions in total compensation and head financial institutions like JPMorgan Chase, Citigroup, Bank of America and American Express.”

Per the statement, the pair claims that the median credit card interest rate is currently 21 percent and argues that there is no reason for banks to charge such a high interest rate.

“There is no justifiable reason that a person—no matter their background—should be charged an interest rate higher than 15 percent,” Ocasio-Cortez said. “Rates higher than 15 percent are predatory debt traps, designed to keep working families underwater and allow predatory companies to enrich themselves off the misfortune of others.”

Like many bad ideas, this one sounds good on the surface. Bankers make an easy target for populists and everyone hates paying credit card bills.

In reality, however, high interest rates on credit cards do serve important purposes. One of the most important purposes is to discourage consumers from carrying even larger amounts of revolving debt. By March 2018, Americans carried $1.027 trillion in debt on their credit cards. Without high interest rates, the amount of indebtedness would be even higher.

By making revolving credit expensive, banks encourage consumers to only charge to their cards what they can pay off at the end of the month. If you pay off your balance every month, you don’t pay any interest at all.

High interest rates also signal the risky nature of credit card loans. Credit card default rates are down from a high of 6.7 percent during the Great Recession, but credit card payments are often one of the first things to stop when times get hard. With an average balance of $6,354, banks can be left on the hook for many thousands of dollars when credit card holders default.

Even though credit card debt can be hazardous to your financial health, credit cards are a near-necessity of modern life. The availability of high interest rate cards allows many people who are considered credit risks to get a card that would not be available to them otherwise. If the Sanders-Ocasio-Cortez bill becomes law, the effect would be a shortage of credit for many Americans. It is axiomatic that price controls, such as an interest rate cap, lead to market shortages.

In the early days of credit cards, the now-ubiquitous plastic payment devices were used almost exclusively by the wealthy. It has only been in recent decades that credit cards became commonplace among the middle- and lower-income groups. Under the Democratic proposal, it’s likely that the trend of easily available credit for the common man would be reversed.

Some would argue that reducing credit card use would be a good thing. I have sympathy for this argument as a guy who has paid off thousands of dollars in credit balances more than once. Credit cards are a financial tool that can be very destructive if used improperly.

The problem with the Bernie-AOC solution is that government intervention in the markets would inhibit people who need access to credit from getting it. Rather than reducing credit card use overall or capping interest rates, a better solution would be to teach consumers to use credit responsibly.

Until then, I'm sure that Bernie and AOC would give voters the guarantee, "If you like your credit card, you can keep your credit card."

Originally published on The Resurgent