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Interest rates – now is the time to act

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Before I start this week’s topic I wanted to follow up on a new development regarding the crisis in Haiti.  Today, the IRS issued a press release announcing that cash donations to Haiti relief made between 1/12/2010 and 2/28/2010 will be allowed to be deducted on the 2009 tax return if you are itemizing on Schedule A of the 1040.  See the link below for the full details on the IRS website.

 http://www.irs.gov/newsroom/article/0,,id=218678,00.html

 Today I wanted to speak briefly about interest rates.  As of right now the prime rate is 3.25% and has been since December 2008.  The Federal Reserve influences the prime rate based on the rate it charges bank’s for borrowing.  Right now that rate is at a historical low.  The last time the Federal Reserve spoke on the rate it charges banks it stated it would stay at the current rate for an extended period of time.  Many have speculated that meant at least until the summer months and maybe until the end of 2010. 

 I believe now is the time to be proactive and begin evaluating your borrowing needs.  Take a look at your anticipated capital spending projects requiring significant borrowing and consider moving them up to lock in lower rates.  Another item to consider is to convert your variable debt to a low fixed rate.  When doing so you will have to consider the cost to refinance your debt the same way as you would when refinancing your house. 

 Another item to consider is variable debt that has a provision to re-set the interest rate every 3 or 5 years throughout the term of the loan.  If you are currently paying an interest rate of 7.5% on a loan that is priced at prime plus 1.5% and the next reset will take place in a year, perhaps you should consider refinancing before rates go up.  Many speculate that once the economy recovers, interest rates may begin to rise drastically to slow anticipated inflation as a result of the stimulus and huge deficits.  It would seem to make sense to lock in rates now while they are low rather than risk having that prime plus 1.5% rate re-set at 10% once prime is at 8.5% next year. 

 Maybe an 8.5% prime rate is an unreasonable scenario but most every one believes interest rates will be higher a year from now and current rates have never been lower.  Crunch the numbers and it might make sense to pay a visit to your banker.

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Written by pacelinebiz

January 25, 2010 at 9:03 pm

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