Borrow Like There's No Tomorrow

10/06/2010 12:00 pm EST


Liz Pulliam Weston

Personal Finance Columnist, MSN Money

Liz Pulliam Weston of MSN Money says that despite all the deleveraging in the economy, qualified borrowers can lock in the deals of a lifetime.

We all know too much credit, too easily given, helped trigger the financial crisis that led to the Great Recession.

With so much uncertainty, many people are focused now on getting rid of debt: shortening their mortgages, avoiding car loans, and paying down their credit cards.

But rates on many types of loans may never be this low again. Could some of us be missing our once-in-a-lifetime chance to lock in cheap money?

Consider what's available to people with good to excellent credit scores:

Rates on 15-year mortgages have dropped under 4%, and traditional 30-year fixed-rate mortgages average around 4.5%. With a tax deduction and a moderate amount of inflation—which has averaged 3% until recently—the real cost of this money would be pretty close to free.

The rate on subsidized federal student loans is 4.5% this school year and will drop to 3.4% next year. Again, with a tax deduction for the interest and anything close to normal inflation, this money would be free or nearly so.

There are [several] reasons you should be cautious.

Any loan may be too expensive if you don't have a job. Officially, 14.9 million people, 9.6% of the workforce, were jobless in August. That's enough to make almost anyone leery about the security of his or her job.

Qualifying for a loan can be tough. Good credit scores may not be enough. If you want [to] refinance, you'd better have at least 20% equity in your home and a stable, provable income. Home values have plunged and lenders have gotten pickier about who gets money.

[Also,] the specter of deflation looms. Inflation erodes the dollar's buying power, making it cheaper to repay loans with future, less valuable dollars. Deflation makes loans more expensive to repay, because each dollar is worth more over time.

Still, I think there are some scenarios where you should at least consider borrowing more.

If you have a strong desire to own a home, you've saved up at least a 10% down payment and you're prepared to stay put for at least five years—and preferably ten years—this could be a good time to buy. Housing prices may fall some more, but trying to time real-estate markets is about as futile as trying to time the stock market. In the long run, if you can afford the home you're buying, you're likely to come out ahead.

[Also,] with all the coverage of people drowning in student-loan debt, I worry that capable people who could improve their situations with education won't do so because they're so scared of student loans.

A college education doesn't guarantee job security, but in general people with degrees earn more and get laid off less often than those with just high school educations.

It's good to have a healthy fear of debt, but a reasonably priced college education really can help you get ahead, and federal student loan debt may be the most flexible debt you'll ever see.

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