Last year the Federal Reserve started an aggressive interest rate cut plan in hopes of making borrowing money more affordable for homebuyers, small business owners and other consumers. The Federal Reserve has gone as far as setting their “target rate” at 0%, meaning that they will adjust the amount of money that they put into the market on some types of loans will have the lowest interest rate possible. The Federal Reserve went a step further in the month of March by announcing that they are planning to pump another $750 billion into the mortgage market.

How Low Have Rates Gotten?

We’ve seen the interest rates available on mortgages dip well below 5%. If you have good credit, you can take out a 15 year fixed-rate mortgage loan for approximately 4.5% in today’s market. If you are looking at a 30 year fixed-rate mortgage, you can pretty easily pick one up at 4.75% or 4.875%. If you look into the world of adjustable-rate mortgage and some of the less-traditional mortgage products, you can pick-up an interest rate less than 4.5%. For example, with ING Direct’s “Easy Orange” mortgage (a 5 year fixed mortgage that amortizes as a 30 year loan would with a balloon at the end of the 5 years), you can currently pickup a 4.25% rate with minimal closing costs, no points and no origination fees.

Refinance and Save:

If the current interest rate that you have on your mortgage loan is at or above 5.5%, you are definitely a candidate to refinance your home loan. Let’s say that you had a mortgage of $100,000 at 5.5%. If you could drop that interest rate down to 4.25% by refinancing you would save $1,250 per year in interest, meaning that your monthly mortgage payment would drop down from $817.08 (on a 15 year note) to $752.28. If your closing costs were $1,500, it would take you about 23 months for the amount of money you save each month to break even with the cost of the refinance. After that, you would be “in the black.” Use an excel savings calculator or an interest only mortgage calculator to help you with this math.

First Time Home Buyers:

If you are currently renting, it’s a great time to buy a home if you are financially ready. You’ll be able to get an extremely favorable interest rate on your mortgage. In addition, you will benefit from the $8,000 first time homebuyer’s tax credit if you buy a home before December 1^st. Since the real-estate market is depressed in many parts of the country, you will also be able to get a home for a lot less than you might have been able to two or three years ago.

Lowering the Interest Rate on Consumer Debt:

If you have a home equity loan or have a lot of consumer debt, you might be able to refinance that debt to a lower rate on a home equity loan. Currently the typical rate for a $50,000 home equity line of credit is about 5.45% according to BankRate.com. This is a lot better than paying interest credit cards which could be well over 20%.

If you plan on going down this route though, proceed with caution. Getting a better interest rate on your debt won’t solve your debt problems, only living on less than you make will do that. It will certainly help, but getting out of debt will be much more about you throwing every bit of money that you can get on a debt until it goes away. You’re also shifting from “unsecured” debt in many cases to a “secured” debt where the bank can take away your home via means of foreclosure where they otherwise wouldn’t have been able to before if you didn’t pay your consumer debts on time.

You’ll also want to make sure that you’re not stuck with a higher payment when all is said and done, to do so make use of a mortgage payment calculator.

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