In Your 50s? Take Advantage of Low Interest

BOSTON ( TheStreet) -- The older I get, the more I relate to the saying, "The more things change, the more they stay the same." Just a few years ago, for example, the news dominating the headlines was Elliot Spitzer's political scandal. Fast forward and the only thing that seems to have changed is the name of the politician in the hot seat, from Spitzer to Schwarzenegger to Edwards to U.S. Rep. Anthony Weiner.

On the economic front, we've also gone through our share of headline-making stories since 2008, but one story that hasn't changed is the historically low-interest-rate environment. While another political scandal may not be worthy of further commentary, the recent news that the Fed could initiate another round of interest rates cuts merits some attention.

Federal Reserve Chairman Ben Bernanke says interest rates may remain near zero. There are ways to take advantage of these interest doldrums.

Federal Reserve Chairman Ben Bernanke acknowledged last week that the slower economic recovery in the U.S. could lead to an extension of monetary policies to help stimulate growth, such as holding interest rates near zero. Given this environment of slower-paced growth and low interest rates, what financial strategies make sense? Are there still ways people, particularly those in their 50s or older, could "make lemons into lemonade," and turn what seems to be dour economic conditions to their advantage?

One of the most obvious options to consider is refinancing a home. Even if one refinanced a few years ago, it may be worth going through the process again and potentially getting a loan with a lower rate and shorter term. The general rule of thumb is that refinancing makes sense if you can secure a loan at least 1% lower than your current mortgage. Administrative fees and other closing costs could run a few thousand dollars, so make sure you take those expenses into consideration when making the final decision. A good resource for mortgage calculators and other tips on borrowing is The Mortgage Professor.

Many people fortunate enough to have cash reserves beyond their emergency fund often contemplate whether they should use those funds to pay off their mortgage. These days, when even the most ardent interest rate shopper would be pressed to find a money market fund or short-term CD earning much more than 1%, it's possible that redirecting those savings to pay the remaining balance on a loan may be the most financial sense. By doing so, you may save thousands of dollars of interest-rate payments over your lifetime.

There are some downsides you need to consider, though, notably that paying off your mortgage means locking your cash in your home and risking not being able to tap into that equity easily for future use. In addition, when weighing your options, make sure you consider the effects paying off your mortgage will have on your taxes, since you will no longer be able to claim the home mortgage interest deduction on your federal and state tax returns.

If you already own your home and have additional cash in the bank but also have adult children paying a mortgage, a unique strategy to consider is the intra-family loan. Rather than have your children finance with a bank, they can borrow from you. The process is relatively easy: You essentially act like a bank, agree to loan terms with your child, including the interest rate and the timing of repayments, and detail the arrangement in writing. An intra-family loan is a great way to ensure that the potential benefits of the loan stay within the family, rather than being passed on to a third party such as a bank or mortgage broker.

For instance, let's say you agree to lend your daughter the remaining balance on her mortgage at 3%, a rate lower than current 15-year mortgage rates. She benefits from the lower interest rate; you benefit from getting a higher rate on your cash than would be possible in a money market or CD. In addition, the loan is not considered a "gift" since it is being paid back with a rate of interest, and thus it is excluded from your lifetime gift calculations (and therefore will not incur gift taxes). The use of intra-family loans is a good option if any of your adult children may not qualify for a loan otherwise due to their credit history or stricter rules on lending.

Over the past few years, it may seem little has changed either in politics or the economy. While our politicians may have more trouble finding the silver lining in the cloud, there's hope for the rest of us to turn the situation to our advantage.

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Greg Plechner is a CFP and a principal at Modera Wealth Management LLC, based in Westwood, N.J., and Boston and a member of NAPFA, the National Association of Personal Financial Advisors.

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