Concerns about the COVID-19 coronavirus have generated elevated volatility in financial markets in the past few weeks. Stock markets in the United States and around the world have seen large drops, and interest rates have fallen across several financial products. As a result, markets are flashing red on the risk of a global economic recession.
Adding to COVID-19 fears, an oil price war between Russia and Saudi Arabia has exacerbated the market turmoil. The benchmark 10-year Treasury interest rate tumbled to 0.318% on March 9, a record low.
All of these uncertainties beg the question: What changes, if any, should consumers make to their finances? Here are several financial risks and opportunities we’ve identified from the tumult in the market.
- Money is on sale. Credit, or borrowing money, is a product just like any other, and interest rates are just the price of money from a bank or lender. With the decline in Treasury interest rates and the Fed cut of 50 basis points (and more cuts expected), it’s like a big Black Friday sale on money. Consumers should call their lenders and request lower rates or shop around to find better deals.
- Refinancing mortgages. Mortgage interest rates have seen dramatic declines over the past month. Rates were already favorable, with the 30-year fixed rate down nearly 1 percentage point at the end of January from a year ago. Since then, 30-year fixed rates have fallen another 40 bps, and there are 30-year fixed rates currently available under 3%. The 40-basis-point decline represents interest savings of about $10,000 for every $100,000 borrowed.
- Refinance everything else. While most homeowners know they can refinance a mortgage, consumers, in general, may not realize you can refinance virtually any type of debt. For example, a balance transfer is refinancing credit card debt from a high-interest card to one with a lower rate. Credit card debt can also be replaced with a personal loan, which often has lower interest rates than a credit card. An auto loan can be replaced with another auto loan or home equity line of credit. Student loans can also be refinanced.
- Shop around. With the rapid moves in rates right now, not every lender is adjusting their interest rate offers to the same extent. For mortgages, the same borrower may be eligible for rates that can vary by more than 50 basis points from different lenders. Loan fees also differ considerably, underscoring the importance of shopping around with multiple lenders. For non-mortgage financial products, there are even larger differences as the products are less standardized.
- Stay disciplined. The biggest mistake some people make when they replace one type of debt with another is increasing their overall debt level. To fully benefit from lower rates, don’t overextend your borrowing. If financial discipline is a challenge, consider closing a credit card account after you replace it with another that has a lower interest rate. While this may lower your credit score initially, this step can help you avoid adding even more crushing debt that you might struggle to repay.
- Hold on to your assets. When market volatility rises, the price of certain assets like stocks or real estate can fall. As a result, it can be tempting to panic and try to sell these assets to prevent future loss. However, because of the nature of both the housing and stock markets, the values of these assets usually rebound. In other words, consider holding on to your assets — even if their value falls — while you wait for markets to recover.
- Speak to your financial advisor. If you have one, speak to a financial advisor who can help you make measured decisions and not succumb to emotion. It’s also a good time to review your financial plan to improve your chances of meeting your financial goals.