McLean Heuristics

Negative economic news can be downright depressing if you listen to too much of it. Thankfully, it can also create some wonderful financial planning opportunities.  Think back to the financial meltdown of late 2008 – which opened up the door to tax loss harvesting that we performed for most of our clients. The latest round of economic uncertainty has likewise presented us with a beautiful gift: historically low mortgage rates.

You might be thinking, “Well, I’m all set. I refinanced a while ago.” But if you have a mortgage or a home equity loan or line of credit you should be reviewing where you stand in light of how the economic news has been driving mortgage rates down. Did you know you can obtain a 30-year fixed rate mortgage in the low fours? 15-year fixed mortgages are now available in the mid-threes, and 10-year fixed rates are in the low threes. Take a look at this chart from the Federal Reserve Bank of St. Louis. It contains 40+ years of history for 30-year conventional mortgages. The chart only illustrates monthly rates – so it’s missing the additional drops that have occurred so far in August. If we add in that last couple weeks of data, we see mortgage rates are flirting with new record lows.

As you know, we can’t predict which way mortgage rates will go from here, but the announcement recently from Standard & Poors that they are downgrading Fannie Mae and Freddie Mac, could very well put upward pressure on mortgage rates as we go forward. Looking at history, and at the current mortgage rate environment, we believe now is as good a time as any that we’ve ever seen to consider refinancing your mortgage.

And when it comes to variable rate home equity lines of credit (HELOCs), these are still available at 2.75% from a number of banks and credit unions. With the Federal Reserve’s announcement on 8/9/11 that they do not intend to increase rates for the next two years, it’s possible that these low rate HELOCs – with rates tied to the prime rate – could be here for a while. This is in contrast to conventional mortgage rates – which fluctuate based on a number of other factors – and could easily increase swiftly from these record lows.

A number of our clients wisely followed our advice in recent years to take their higher-rate, fixed mortgages and converted them to 2.75% variable HELOCs in order to accelerate principal repayment. If you’ve done this, and the remaining balance on your HELOC is relatively small, it likely makes the most sense to continue with your accelerated pay down strategy. However, if your HELOC balance is large enough, you might want to consider moving back in the other direction. With fixed rates on 10-year mortgages in the low threes, you might be able to convert and lock in a very attractive rate that is only half a point or so higher than the 2.75% that you’re currently paying.

If you’d like to discuss your current mortgage or HELOC, please give us a call and we’ll be happy to analyze your situation, and provide you with the guidance you need.