The Cost of Credit Has Hit Bottom

Interest rates have hit bottom–now here’s what to know!

Interest rates persist at all-time lows. The cost of credit is low, and the Federal Reserve would like it to be even lower. Despite efforts by the Fed to lower interest rates even further, banks are holding steady at around 3.5 percent for the 30 year mortgage (3.45 percent on January 3rd). In part, they claim that their costs have increased with the new lending rules and the added attention devoted to each application.

Some lenders argue that they deserve to make a fair profit on transactions that are much more costly now than they were in the past. Critics argue that past costs were lower because banks were unscrupulously cutting corners and the consumer should not be penalized by absorbing those costs now. No one disputes that each loan application is scrutinized far more closely today than ever before.

Banks currently earn an average of 1.3 percent (the difference between their cost and the rate they charge). Historically, this margin has been closer to half a percent. According to the Wall Street Journal, bank revenues are soaring. Consumers, generally very happy with the low rates available today, have not voiced much concern over this profit margin.

The obvious downside is that reductions in interest rates intended as economic stimuli are not reaching American consumers. Banking officials note higher litigation costs and new regulations as drivers of their decision to stick to their current spread.

Consumers are getting out of debt

The good news is that consumers are paying off credit cards and other loans at a rate not seen since the early 1980s (only 10.6 percent of after-tax income went to debt payments in the third quarter of 2012). The causes vary. Some consumers were relieved of debt through foreclosure or bankruptcy. Others, in light of the recession, chose to spend the last few years paying down their debt. Finally, very tight lending standards now make it much more difficult for many Americans to take on new debt; some folks who would like to take out a mortgage simply cannot.

Falling debt will result in healthier finances for many Americans, ultimately allowing more people to qualify for those record-low interest rate loans.

The golden age of the mortgage persists. Would-be home buyers and those who want to refinance should make it their goal to obtain the loan in 2013.