Part of being American means wanting the best for you and your family — and that should include the best interest rates for your money, which include your savings accounts, mortgages, credit cards and CDs.
You might not think a few percentage points, up or down, can make a big difference, but over time they can have a huge impact on your wealth and well-being.
That’s why we’ve put together this financial guide to help you hunt down the best interest rates in hopes that your money will work as hard as you do throughout the year.
1. How to find the best savings rates
In 2013, the average savings account yielded .06 percent. In other words, if you put $10,000 in the bank on Jan. 1, you would have earned $60 by Dec. 31. Congratulations. Go fill up at the gas station with your interest earnings.
The rates, on average, have been just as anemic in 2014, but for the savvy rate-shopper, you can do better — a lot better.
Several online banks offer savings rates in the 1 percent range. They can afford to reward savers far more than traditional banks because their overhead for personnel and maintenance is so much less than brick and mortar branches.
For example, a review of banks on MyBankTracker’s savings rate page (on Nov. 26) shows that Synchrony Bank (1.00%), G.E. Capital Bank (.95%) and Ally Bank (.90%) all offer vastly superior savings rates than their traditional bank competitors.
EverBank, currently offers a “Yield Pledge” on its traditional deposit accounts. This pledge promises to keep interest rates on its savings instruments in the top 5 percent of similar accounts offered by other top financial institutions.
Besides the attraction of offering higher savings rates, online banks aren’t bound by geographic boundaries, so in the event you might have to relocate, your online bank doesn’t. That’s a nice perk. Online banks also make it easy to transfer funds between accounts, as well import data into your favorite personal finance program.
Similarly, some banks and credit unions offer rate promotions that target specific demographic groups such as veterans, students and youth. For example, the Department of Defense sponsors the Savings Deposit Program (SDP) in which active members of the uniformed services, such as the U.S. Army, can deposit money, up to $10,000, into a savings account that accrues interest an annual rate of 10 percent and compounds quarterly.
2. How to find the best mortgage rates
First, a quick primer on how banks typically obtain their money to lend, also known as their “cost of funds.” Banks can generate revenues by collecting fees from the products and services they sell. They can borrow money from their savers’ deposits and lend it back out at a higher return (referred to as their margin), and they can borrow it from other banks, including the Federal Reserve Bank.
Each option involves a different cost or expense. For example, it might be cheaper to borrow money from another bank than it would be for a bank to heavily advertise and market for new savings customers. So, each bank’s loan pricing will vary slightly, based on its cost of procuring funding.
That said, the biggest driver of interest rates is not your favorite bank or lending institution, but a group called the Federal Open Market Committee, which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. This group of 12 establishes the rate or the cost of money. These fiscal policy makers will vote to lower or raise interest rates on everything from mortgages to credit cards, depending on how they view the relative strength or weakness of the U.S. economy.
Okay, enough for the economics lesson. If the above is true, and the government is largely responsible for setting rates, why do rates fluctuate so much from lending institution to lending institution? For example, on the current MyBankTracker (Nov. 26) mortgage page, you can see a list of the top 12 mortgages rates offered from around the country. The best rate shown is from AimLoan at 3.77 percent for a monthly payment of $1,852 (based on a $400,000, 30-year fixed-rate loan) and the least attractive rate in the top 12 was 4.74 percent at Citizens Bank and U.S. Bank for a monthly payment of $2,086.
The spread of nearly 1 percent is significant enough that it should compel consumers to relentlessly comparison-shop for mortgages.
The reason there is so much play and discretion in the rates depends on four conditions that both lenders and consumers can control to a large extent. Here are the four conditions and how they can impact your objective to achieve the best mortgage rate:
Mortgage term (or length of mortgage)
The standard home loan is a 30-year mortgage, which the vast majority of home buyers take out. Amazingly, it can be the one of the most expensive mortgage products, however, if you don’t live in your home for 30 years. If you knew you planned on living in your home for, say, five or 10 years, you could obtain a much lower fixed-rate for the initial five or 10 years by taking out a 5/1 or 10/1 adjustable rate mortgage, whereby the rate would be fixed for the first five or 10 years before adjusting every year thereafter to the new market rate at that time.
So, if you are fairly certain about the length of time you plan to spend in your new home, select a mortgage product that fits that time frame, not just the one-size-fits-all 30-year product. This flexibility will help give you the best rate mortgage.
Again, wherever you see a mortgage rate, consider that just a starting point, which is usually the rate quoted for those with the best credit. To get a ballpark idea of what rates are going for, you could simply review the mortgage rates released every Thursday (10 a.m. EST) by Freddie Mac. For example, this week’s average rate of all the banks that Freddie Mac tracks in its weekly survey is 3.99 percent.
If you have a top credit score (740 or higher on a scale of 300 to 850), you will likely be quoted a rate close to the published rate. But if your credit score is less than stellar (spotty payment history, lack of credit history, etc.), expect your lender to quote you a higher rate.
Discount points are an upfront payment of interest in exchange for a lower rate. Typically, each point is equal to 1 percent of the total amount mortgage, so if you took out a $100,000 loan, it would cost you $1,000 to buy a point. A point usually translates into a reduction of a quarter of one percent (.25).
Suppose you wanted to buy down your quoted rate of 5.125 percent to 4.875 percent, in other words, a quarter of a percent to take your monthly payments down from $1,088 a month to $1,058 a month. To do so, you would be charged one point.
The reason it is important to know how a” buydown” works is that mortgage rates are often quoted alongside points. Thus, at first look, one lender’s 4.875 rate appears better than another lender’s 5.125 percent quote, until you realize it will cost you a point or $1,000 upfront to get the better rate. So, there’s a game going on, and you have to be aware of the rules shaping the outcome of the game.
Instead of choosing to pay a lower interest rate, you could actually choose to pay a higher rate. Why in the world would you ever consider that option? Some lenders offer what is known as a zero closing-cost mortgage. With this kind of mortgage the borrower largely avoids a basket of fees that a lender typically charges to close a loan, such as loan processing, title search, deed recording, credit report and other fees. You might pay another eighth of a percent (0.125) on your interest for the privilege of not paying closing costs, but you could come out ahead in the short, but not the long, run, and that’s just fine, if you don’t plan to live in your new home a long time.
Suppose the added 0.125 tacked on another $50 to your monthly mortgage rate, equaling $600 a year. But if you’re closing costs were going to amount to $5,000, you could live in your home for eight years (8 x $600 = $4,800) and be better off financially than if you had paid a lower rate but with $5,000 in closing costs.
To sum up, you have to take into account several factors and conditions that influence interest rates. In theory, they should be pretty much the same, but in reality they’re not. And you deal in reality. To obtain the best mortgage rate, first try to find out the average going rate for mortgages. Again, they’ll fluctuate from week to week as shown by Freddie Mac’s weekly survey. Then, check MyBankTracker’s mortgage rates page to help you with your rate comparisons, keeping in mind that you sometimes have to read between the lines, regarding terms, discount points, closing costs and your own credit score, to obtain the best rate.
3. How to find the best credit card rates
Here’s why you want to pay the least amount of interest on your credit cards. If you ring up $1,000 of charges on your credit card in a month, but pay back only $900, you’re carrying forward a balance of $100. If the annual interest on your card is 18 percent, your monthly finance charge would be about $1.50. That doesn’t seem like too much, right?
But as of November 2014, U.S. households with at least one credit card hold, on average, $15,593 in credit card debt. So given that total, the average credit-card-holding family is paying about $232 in finance charges every month. With a lower interest rate, of course, the average credit-card carrying family would pay less in credit card charges each month.
As with applying for a mortgage rate, your credit score will be a key factor in the credit card interest rate you receive. The higher your score, the better the interest rate you should command, or at least your good score should present you with a greater selection of card companies who want to compete for your business.
That’s because the credit card business is so lucrative. After all, who wouldn’t want to be in the business when returns are 18 percent or higher, based on the simple math that banks pay depositors just a tiny fraction over zero percent before turning around and lending out that money for credit card loans at double-digit rates.
Therefore, to get a better rate, let the credit card-issuing banks fight over you. When you see a great promotional balance transfer offer, jump on it. For instance, if you’re paying Bank of America credit card debt off at 14 percent, and Chase offers to carry your debt for six months at 0 percent, seize the day!
Banks aren’t dummies, of course. They’re figuring that you’ll miss a payment, voiding your promotional period, or you won’t have paid off your balance before the initial period has expired.
Another way to get the best credit card interest rate is to call your card company and hint that you’re considering a competitor’s new credit card offer, which is substantially lower than what you’re currently paying. The threat, veiled or real, could help you lower your interest rate by several points.
If you’re someone who never or rarely carries a credit card balance, then it really doesn’t make any difference what interest you pay. A 25 percent interest rate multiplied by a zero balance is still zero!
If you’re a credit card holder who falls into this select class, consider a cash rewards credit card based on the amount of money you put on your card each month. Your cash reward might come in the form of a check or a credit on your statement. If you don’t want cash back, there are rewards programs for shopping, airlines, hotels, gas and grocery purchases and so on.
In short, to get a good interest rate on your credit card, keep improving your credit score, then let the banks and credit card companies wow you with offers.
4. How to find the best CD rates
CDs are low-risk types of low-risk savings accounts that pay out interest in addition to the principal at maturity. Of all bank products, they are probably the easiest of bank products to compare, making it the easiest for you to obtain the highest interest rate possible. For example, were you to go on the MyBankTracker CD page, you’ll find it easy to compare the CD offerings of two banks or 50 banks. Just be sure that you’re comparing apples to apples. For example, when comparing rates, make sure you’re also comparing similar terms (a 1-year CD at 1.25% v. a 1-year CD at 1.15%).
But before you hop online or go running to the branch offering the highest CD rate, you need to consider a couple of other factors.
First, you need to consider how much money you want to lock up. Typically, larger CD investments attract higher interest rates.
Second, you need to weigh something called “opportunity costs.” In other words, you might be patting yourself on the back for locking in a very competitive 1 percent rate on Nov. 1, but you might be less pleased to find the same type of account is paying 2 percent on Dec. 1, because of rising interest rates. So before deciding to purchase a CD, you should at least have an opinion on which direction interest rates will take. If you foresee them rising, then you seek CDs of shorter duration.
Third, in the event you’ve already locked in a rate that is now less attractive because of a sudden spike in interest rates, you could weigh the costs and benefits of breaking your CD contract for which there will be a penalty. You simply have to decide if the benefits of a new CD at a higher rate outweigh whatever penalty you will have to pay. The best time, of course, to review penalties is before opening a CD. Should two CDs offer similar rates and terms, for example, compare their early withdrawal penalties. Whichever is the least severe could give you the most flexibility in a rising-rate scenario.
Fourth, try laddering your CDs, which allow you regular, penalty-free access to a segment of your savings while still helping you earn higher interest rates overall. To employ this strategy, simply buy CDs at staggered intervals, so one will be maturing every few months for you to reinvest at a higher rate or to deploy in another way to give you the best return.
Finally, you might avail yourself of some banks that offer unconventional CD products. One product is a bump-up or raise-your-rate CD that allows you to raise the interest you receive one or more times during the term in a rising-rate environment. The initial rate that you receive, however, will typically will be less than you would receive on a straight CD. Another less traditional type is an indexed or variable-rate CD that will mirror the direction of interest rates overall, so if you believe rates will be floating upward, this product would be better than investing in a traditional CD.
Make the percentage play
Obtaining the best interest rates on various banking products take insight and intuition, but most of all, effort. You have to constantly monitor rates and special promotions and run “what if” scenarios on upfront costs versus long-term gains.
But over time, if you play the percentages right, you’ll come out way ahead.