The best investment these days is refinancing your debt
The stock market is up and down, giving back gains as fast as it makes them; real estate values are in the tank; Treasury bond yields are meager at best and interest rates on bank deposits are floating somewhere between squat and zilch.
So what's your best investment? Try refinancing your debt.
"People holding debt are seeing that it's time to refinance," says Timothy Swanson, the Metro Detroit manager for J.P. Morgan Private Wealth Management. "It's a good time to borrow because rates have never been this low."
Say you want to pay off a $2,000 credit card balance in the next three years. If you can refinance the debt from 18 percent interest to 12 percent interest, your interest cost drops from $603 to $391 -- a guaranteed 8.1 percent return on your money. That's a lot better than the average 1.27 percent you can get on a one-year bank certificate of deposit or a money market account paying as little as 0.50 percent, not to mention the paltry 0.17 percent you've made with the Dow Jones index so far this year. And if you've got cash sitting around that's barely earning any interest, using it to pay off the balance with one lump sum saves you the entire $603 in interest -- an 18 percent return.
The trick to making refinancing work is that you need to have good credit, hunt for bargains, and factor in any refinancing costs. In the case of refinancing an auto loan, you may have no cost at all, while a new mortgage could cost several hundred dollars or more.
Credit cards
When the economy tanked, credit card balance transfer offers dried up, says Bill Hardekopf, CEO of LowCards.com. Now, he says, "One of the amazing surprises is the rebound of these offers. You can find cards that give you 0 percent on balance transfers for 12 months or even up to 18 months."
There's a catch, of course: the transfer fee, which can be up to 5 percent of the amount transferred. That charge is placed on your card immediately, raising your balance. So compare your savings after you include the fees. Some cards charge 4 percent fees and you can find a few that still limit it to 3 percent.
Be sure to read the fine print, Hardekopf says. A card may advertise up to12 months of no interest without guaranteeing you a year at 0 percent. Also make sure you abide by all the rules, or your intro rate -- which is not covered by new federal credit card rules -- could evaporate after a late payment.
Finally, check to see what your rate will be after any introductory period ends. Most will be adjustable and will rise if interest rates go up. Your best bet is to start with cards you have now and just ask for a lower rate or balance transfer deals, if you have more than one card.
Don't forget unused accounts that you may have sitting dormant -- the card company will be glad to collect your fee and get your business back. After that, check the card comparison sites and look for your best deal.
Car loans
The place to refinance an existing car loan is probably with one of Metro Detroit's credit unions, which typically offer rates that are 1 percent to 1.5 percent lower than competing banks, says Dave Adams, president and CEO of the Michigan Credit Union League.
"Most credit unions right now have auto loan rates as low as 3.99 percent or 2.99 percent," Adams says. "If a consumer can refinance an auto loan and save 1 percent, on a $20,000 loan, that's about $200 saved in their pocket every year."
Refinancing also can help consumers who ran into credit problems in the past but have improved their credit score or shored up their finances since the initial car purchase, Adams says. Even in the case of borrowers with bruised credit histories, a credit union may still offer attractive options. "Credit unions will stretch to work with members, and their rates are almost always better," Adams says.
Thanks to changes in state law, anyone can find a local credit union to join, he notes. Banks however, shouldn't be ignored. Chase.com also offers auto loan refinancing, and features a calculator to estimate your savings.
Mortgages
The continued drop in rates has pushed even 30-year home loans to an average of less than 4.5 percent this month. "The 30-year mortgage rate is lower than it's ever been while I've been in the business," says Swanson of J.P. Morgan.
The big problem is getting around the appraisal question, though, since it's hard to refinance a house where the loan balance is more than the house is worth.
Borrowers with a large investment portfolio can work around that by using investment assets to back the mortgage along with the property. That allows them to get some gain out of their stagnant stocks without having to cash out before the stock market regains value.
"It's a great strategy if someone has short-term borrowing needs," Swanson says, noting that investors can use these kinds of loans to pick-up a bargain-priced second home. "If they borrow wisely, they can maintain their long-term investment plans without have to disrupt them."
Other homeowners may find relief with options from federally-backed lenders, notes Harry J. Glanz, co-founder of Capital Mortgage Funding in Southfield. For the past few months, Fannie Mae and Freddie Mac offer programs that lend up to 105 percent of the home's value, while the FHA can handle refinancing for up to 97 percent.
"It's not going to help someone with an $80,000 mortgage where the home value is $60,000 now," Glanz says, "but it's given people some options."
If the value of your home is in question, shop around for a mortgage broker who will order an appraisal before collecting an application fee. That way you're only on the hook for the $300 or so for the appraisal, not out several hundred dollars in fees for a mortgage application that has no chance of being approved.
In other cases, homeowners find that it pays off to put more cash into their homes so they can refinance at lower rates. In a so-called "cash-in" refinancing, borrowers pay down the loan balance to qualify for a new loan, using cash that isn't bringing in much in interest or investment gains.
"It's happening a lot," Glanz says, often so homeowners can shorten the term of their loans from 30 years to 15 years, cut their total interest, lower the interest rate and pay off the home much sooner.
"Why shouldn't people be able to take advantage of the lowest rates in 50 years?" Ganz asks. But, he warns, "You've really got to do the math and see if it works out and if you know you're going to stay there."
Last Updated: September 06. 2010 1:00AM
Brian J. O'Connor / Detroit News Finance Editor
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