Personal Finance Blog By MoneyRates - August 2009

Impatient savers tired of low interest rates paid on deposit accounts are likely to receive the gift of higher interest rates sometime within the next year, if the economy recovers. According a recent survey of economists at the National Association for Business Economics, upwards of 90 percent believe that the recession will end in 2009.

Mortgage-seekers won't enjoy interest rate rises nearly as much as savers, of course, but should be aware of the same macro-economic probability of interest rate rises sometime within the next year.

"Economists Predict" a Rather Flimsy Statement

Predictions of economic recovery and rising interest rates by economists is not, perhaps, an indication that either will happen on their schedule. Some people even maintain that economists are always wrong.

Keep a Strong Eye on Interest-Rate Affecting Facts

When watching for the direction of interest rates, it's important to maintain sight of important facts, not just "important people" opinions. Three facts to watch when watching for the direction of interest rates are:

-- Unemployment. With consumer spending so important to the economy, it's hard to see a full recovery happening with the consumer under such pressure.

-- The Fed Funds Rate. The most important interest rate in all the land.

-- Gold prices. Large-scale movement of money into gold can be taken as a lack of confidence in the U.S. dollar.

Saving your money isn't always only about getting the best rates on CDs, saving accounts, or checking accounts. Sometimes, saving your money is something you're doing for the good of society, as well as yourself.

So goes the doctrine of a new class of investor: the social investor. This group is interested in what banks do with their money, rather than making decisions purely on monetary factors such as getting the best interest rates.

Faith-based investing has been the most active part of the social investing movement thus far. As detailed in this informative article, investments in the community by faith-based groups currently total about $100 million.

The idea of inquiring about what banks do with your saved funds is not confined to faith-based organizations. Evidence indicates that more savers are asking banks to do social good with their money.

According to Lisa Woll, CEO of the Social Investment Forum, community investing increased from $4 billion in 1995 to almost $26 billion in 2007.

It seems likely that the financial calamities of the past year and a half may give the social saving crowd a boost. Clearly, the financial fates of Americans are inextricably interlinked.

Social saving seeks to make that togetherness a good thing.

Mortgage applications surged last week, as mortgage rates fell to their lowest levels since early July. This is good news for the housing market, but it raises a couple of questions:

• With mortgage rates generally low, are people really holding out for week-to-week dips in the mortgage rate?
• What will happen when measures to stimulate the housing market expire?

Regarding the first question, here's hoping that the surge in application volume was just a coincidence, rather than reflecting people being hyper-sensitive to short-term fluctuations in rates. Bigger picture, rates generally have been lower this year than ever before. It would be extremely unfortunate if someone missed out on this opportunity because they were waiting for one last tick down in rates. Buying a house should be based on need and affordability, not on trying to time the market.

As for the second question, any optimisim about the housing market has to come with the caveat that there are some unusually favorable conditions at work -- conditions which are not going to be permanent. Those low interest rates are not a coincidence -- the Federal Reserve has made extraordinary efforts to keep mortgage rates down. On top of that, there is the $8,000 tax credit for first-time homebuyers. That's enough to give many people the means and motivation to pull the trigger on buying a house.

When these artificial stimulants are taken away, housing prices may again sag. Ironically though, with higher interest rates and no tax credit, buying a house may actually be more expensive once that happens. So, regardless of what may happen next, this is still a good time to buy a house -- providing you are buying to get an affordable place to live, and not to speculate on being able to flip the house at a profit.

You probably haven't seen any kind of a bump up in your savings account interest rate lately, and you won't see banks suddenly offering higher CD rates. Even so, last week's economic news did hold a couple positive signs for depositors.

The good news came in the form of official economic releases on inflation and productivity. Inflation, which had perked up quite strongly in June, was flat for the month of July. That brought the 12-month change in the Consumer Price Index to -2.1%. With prices declining at that rate, it's like adding a couple percent to whatever interest rate you're earning. That means that if you've shopped around for one of the higher savings account rates, you would have seen your purchasing power increase by about 4% over the past year -- with around 2% from interest rates, and another 2% from the decline in prices.

The productivity report gives some fundamental support to the low inflation trend. Productivity gains help the economy grow without bringing on inflation. Strong productivity improvements were one reason why the U.S. economy enjoyed both sustained growth and low inflation during the 1990s. The productivity gain in the second quarter of this year was the strongest in six years.

It is fairly typical for productivity to tick up when an economy first starts to accelerate -- basically, it represents excess capacity being put to productive use once again. So, with the recession starting to ease, this productivity gain was to be expected. Still, it means things are progressing as they should be -- and that even without higher interest rates, depositors may be doing a little better than they thought.

Getting the best rates on CDs, savings accounts, and checking accounts is one way to protect retirement savings. Another strategy is to take advantage of low mortgage rates to refinance for maximum long-term security.

By refinancing to a low fixed rate loan while rates are low, you may be able to improve your financial situation for years to come. My colleague Richard Barrington has been hitting on this point for the past couple months.

A Well-Done Refinance Can Make Savings Planning Easier

Let's take the example of a couple nearing retirement age with good income that has a first mortgage of $250,000, a variable interest rate home equity line of credit of $150,000, and a home value of $700,000. While the variable interest rate on that HELOC may be low now, it could rise.

Locking into a 5 percent first loan that pays off both the original first and the HELOC may be a wise decision.

Certainly from a savings planning perspective it is valuable to have that fixed number in terms of monthly expense, and know that that number will not go up unless you refinance again.

Refinance Dangers Similar to Deposit Account Dangers

If you're worried about the interest rate on your savings account going down, you may want to consider the effect of an interest rate rise on your HELOC. Inflation, if it hits, can cut both ways. Not to mention the tougher income requirements that may make refinancing once you're already retired more problematic.

This is not a call to refinance, only a reminder that wealth preservation requires smart planning.