Ways you can deal with low savings rates

If you want to see a sad snapshot of just how low savings rates have fallen, take a look at some banks that are advertising their so-called best promotional rates for CDs.

Drumroll, please.

How does 2 percent on a 17-month certificate of deposit grab you? Minimum deposit $1,000?

What's even more disheartening is that this isn't a half-bad interest rate that Detroit's Citizens Bank rolled out last week.

Anything around 2 percent is actually very good right now for a one-year CD, according to Greg McBride, senior analyst for Bankrate.com.

What do you expect about nine months after the Federal Reserve shoved short-term rates to nearly 0 percent? We're paying the price now for efforts that were crafted to ultimately bail out the banks and get the country out of a severe financial crisis.

Borrowers, after all, are seeing some bargain rates on mortgages and refinancing, too, if they can qualify.

How long can rates stay this low?

Many experts say they don't expect the Fed to raise rates this year or even early next year. Economists say the Fed could be reluctant to boost interest rates while the U.S. unemployment rate is climbing higher and the recovery appears tentative.

Some economists see the Federal Reserve taking some action to gradually nudge up rates sometime next April or even later in 2010.

How should consumers play the rate game? Here's a look at some strategies:

CERTIFICATES OF DEPOSIT

Citizens Bank advertised a 2 percent yield for a 17-month CD, but the bank has a 3.25 percent yield for a 60-month CD.

But should you jump at the highest rate by locking up money for five years when rates are at historic lows?

McBride warns against chasing long-term rates at the price of losing flexibility.

"You don't want to be locked in for five years at a very low rate if you can avoid it," McBride said. "Interest rates and inflation will likely zoom right past you."

If you keep CD maturities around six months to a year, you'll be able to renew into a higher rate in the near future.

Detroit's Ally Bank, an online bank that was formerly GMAC Bank, is offering one of the higher yields in the country with a deal for a 12-month CD, no minimum deposit, with a yield of 2 percent.

Ally Bank also has what it calls its "Ten-Day Best Rate Guarantee" for new CD deposits and now for its customers who renew their CDs. The idea is to reduce angst for savers who are worried about getting a good rate the day their CD matures.

Ally Bank customers are promised that they would get the best rate offered by the bank at maturity or for nine days after that date.

Some banks continue to offer better rates if the customer also has a checking account with that same bank.

For example, the best CD special that Chase offers now is a 60-month CD with a yield of 3 percent. However, that deal only applies to Chase customers with a linked Chase personal checking account and customers who have at least $10,000 to deposit into the CD.

MORTGAGE RATES

The 30-year fixed rate mortgage fell slightly below 5 percent on average by last May but has since edged up above 5 percent. Bankrate.com said its survey had the average rate at 5.4 percent in early September.

"I don't think we're going to go back and retest those lows," McBride said.

So if you're looking to buy a home or if you have an adjustable-rate mortgage, now may be as good a time as any to make a move.

Is it the best time? No one can answer that with any certainty. No one knows the bottom for rates or housing prices.

While many expect that mortgage rates will stay low, consumers also need to realize that any shock or crisis, such as political unrest in some part of the world, can drive up long-term rates, said Paul Havemann, vice president for New Jersey-based HSH Associates.

HSH noted that mortgage rates have slipped back to the levels seen last spring and if rates hold steady in the next few weeks, refinancing activity should increase.

The trend has been mostly flat-to-down in recent weeks, HSH reported and added that should be the case for next week. "We're hoping for some stability in mortgage rates in general," Havemann said.

McBride said he would not expect the 30-year mortgage rate to climb above 6 percent soon, but he said that one reason rates are low is that the Federal Reserve has been purchasing mortgage-backed securities to get credit markets back on track.

"A lot of these investors headed for the hills when loans started to default," he said.

Yet at some point, likely later this year, the Fed is expected to stop making such purchases and that could drive up mortgage rates rather quickly.

"If they deem that credit markets are capable of walking on their own two feet, they're going to back away from the table," McBride said.

He recommends that some homeowners who have adjustable-rate mortgages now should try to refinance soon to lock in a lower fixed rate before mortgage rates head up much higher.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.

(c) 2009, Detroit Free Press.

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