Daily Dupaco

Saturday, June 16, 2012

The price of low mortgage rates

As homebuyers and other borrowers reap the rewards of low mortgage rates, there's a price to pay for some consumers: the savers.

Historically low loan rates mean deposit rates for savings also are historically low.

How does that work? Dupaco's Chief Operating Officer Matt Dodds explains the relationship:

"The primary function of any financial institution is to hold member or customer deposits, and in doing so we have to pay people to deposit their money into our institution," he says. "How do we pay the interest due on those? By taking the money in and putting it out in the marketplace in the form of loans."

Financial institutions use the interest income generated from those loans to pay for the deposits they hold. The remaining difference, called the net interest margin, is what's used to cover financial institutions' operating costs. So, the two rates must move up or down in tandem.

"Every financial institution earns other noninterest income, but they are really smaller components," Dodds says.

Today's loan rates are low for a reason. With the economy still struggling from the recession, the low rates help stimulate demand - for business owners, homebuyers and consumers in general - to help keep the economy moving in an upward trend, Dodds says.

Mortgage buyer Freddie Mac says the average rate on the 30-year loan is 3.71 percent - up slightly from last week's 3.67 percent, the lowest since long-term mortgages began in the 1950s, according to a recent story in the Telegraph Herald.

The low loan and deposit rates offer a perfect opportunity to reevaluate your financial situation. If you haven't done so, visit with your financial planner to talk about your long-term plans and determine whether your assets are allocated accordingly. With Dupaco's Money Makeover service, a financial expert can help you look at your total financial picture.

"Financial planners are here and exist for your benefit at no cost to be able to bounce ideas off of," Dodds says.

By Emily Kittle

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