Tuesday, January 29, 2008

The Fed rate cuts and my future fiscal policy

I am a saver and proud of it. However, with the Federal Reserve cutting rates by 0.75% and a projected 0.5% at the end of January when they meet, it has really dinged the savings rate in my accounts. My emergency savings are in high-yield savings accounts and CDs, rates that get dropped when the Fed cuts the overnight lending rate. I have some immediately liquid cash in a low-yield credit union savings and checking accounts (0.75% and 0.5% respectively, last time I looked but I am sure lower now) but that is it. I was happy to see my interest earnings from 2007 but 2008 does not look as promising.

However, mortgage rates have been on the decrease as well. My mortgage was locked in January 2006 and I ended up with a 6% interest rate for 30 years. I have been seeing rates around 5.5% for a 30 year mortgage and even lower if I want to consider a 20 or 15 year mortgage. Refinancing is a strong possibility for me this year. While there are closing costs, I am strongly leaning toward refinancing my home when 30 year mortgages fall to 5% APR. That may be a while or may never come.

I have been looking at 15 and 20 year mortgages but I do not think I will apply for one when I refinance. Why? The payments will increase enough that I will feel the pinch. Right not, I pay enough to feel comfortable and afford an extra $35 toward principle. Being in the start of the third year of my mortgage, this amount will not go far, but it is a balance between paying more on my mortgage and putting money in savings. I think increasing my mortgage payment (which does include PMI, property taxes and escrow) even by $100 will be uncomfortable. I could list lots of reasons for it and maybe looking more closely at my budget, I could fit it in with less difficulty than I anticipate. However, this means more of my income is locked into a fixed expense and although I have a savings cushion, the necessity to fix a furnace and replace a water heater plus several vet bills and that cushion would be diminished. If I had to get a new car on top of the increased mortgage and decreased savings account, I could not afford the auto loan payments.

Granted, the above is a worst case scenario, but as a single woman, I need to consider what the effect of my actions would be. Therefore, I need to carefully weigh a shorter-term mortgage and long-term savings against the possibilities of more immediate emergencies and the funds I would need to cover such instances. I was planning to refinance into another 30 year mortgage, but these other considerations did need to be measured to figure out what is my best path. A 25 year mortgage, if one can be found, might be a compromise between fewer years to pay and lower monthly payments. I will have to see what the future brings and how my plans for refinancing fit into it.

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