“It was the best of times; it was the worst of times.”
Perhaps Charles Dickens’ iconic line has never been more appropriate. Twenty years from now, we may look back at 2016 and marvel at the unique set of economic forces at play: a near-zero interest rate environment on the part of nearly every developed national bank, global deflationary pressures coming out of China’s industrial complex and overflowing oil fields, and a soaring dollar against most other major (and minor) currencies. These and other signals indicate we may be headed into a lower-return environment over the intermediate term, at least when compared to the 10-12%/year historic long-term return on stocks (or 5-6%/year historic return on bonds.)
So, that’s the “worst of times” part.
But it’s the “best of times” in another way. When viewed through the lens of history, we may be looking at a “once in a lifetime” opportunity to borrow money at tremendously low rates. This is especially true for a home mortgage. Just think about the fact that you can borrow hundreds of thousands of dollars, at under 4% in some cases, and lock that low rate in for decades. Many times that is with no pre-payment penalties for making additional payments and possibly no PMI (private mortgage insurance.) If you’re are comfortable with a slightly higher payment, some borrowers can even get a rate under 3% on a 15-year loan.
As in most things in life, there is good and bad in each situation. Savers and investors who are used to earning double-digit long-term returns on their investments in the past, may find that difficult to achieve in the coming years. However, for borrowers paying historically low interest rates on their mortgages, things aren’t quite so bad.
For anyone who still has a high-interest mortgage out there, you may want to consider refinancing your mortgage. We don’t know when rates might go back up, but we do know that they are historically low.