Rising Interest Rates: What Do They Mean For You?

If you read financial headlines, you’ve no doubt seen the news that the Federal Reserve has and may continue to raise interest rates.

These headlines can be accompanied with all sorts of hyperbole about the end of the stock market, or a dozen other predictions.
 

It’s easy to get overwhelmed when there’s so much conflicting information...find out what you may want to focus on.

The prime rate is the interest rate that banks charge their most creditworthy customers.  The prime rate also serves as a basis, or point of reference, for determining most other interest rates lenders make available to borrowers.  While many of these are only of concern to investment bankers, professional investors and other economic enthusiasts;  let’s set the record straight on what rising prime interest rates mean for you.

1. You may want to reconsider that  Adjustable Rate Mortgage 
Many people opted for adjustable-rate mortgages (ARMs) when interest rates were historically low. These mortgages often have much better rates for an introductory period, usually five years, before they adjust to a new rate. That new rate is determined in large part by the rate the Federal Reserve charges.

Many expect the Federal Reserve  to continue to increase interest rates as the economy continues to improve. This means the rate on your ARM may go up as well. Worse yet, the rising rates could make your monthly mortgage payment unpredictable, putting you in a bit of a budget bind. Fortunately, you can refinance your mortgage into a fixed-rate loan and take advantage of still-low interest rates. You may still be able to secure a low rate on a 10-, 15- or 30-year fixed-rate mortgage. As interest rates continue to rise, your fixed-rate mortgage will stay the same, meaning your savings will increase as time goes on if interest rates continue to rise.

2. Balance your portfolio

The historically low interest rates over the past six years have done wonders for the stock market. Because companies could borrow at affordable rates, they could expand rapidly. That expansion fuels growth in stock prices.  In addition, investors turned up their noses at the historically low rates and decided to take on the additional risk of stocks for potentially higher returns.

As interest rates rise,  credit use may decrease. Companies could find it more expensive  to expand, and  growth will slow. This slowing of growth may lead to a decline in stock prices.

However, as interest rates rise, bond rates will also increase. That that would likely cause more investors to return to adding bonds to their portfolio.  Individual investors need to ensure their portfolios are properly balanced to take advantage of changing market conditions. Speaking to a financial advisor to ensure your assets are where they need to be will help keep your investments growing at a healthy rate.

3. Save more

The Federal Reserve interest rate also affects the rates that financial institutions are able to offer account holders. As it becomes more expensive to borrow from other institutions, it’s more profitable for those institutions to “borrow” from their members in the form of certificates and savings accounts. As interest rates continue to rise, it’ll be increasingly more profitable to sock your money away in an interest-bearing account.

If you’ve been putting off opening a certificate or increasing the deposits in your share account, now could be the time to take another look.  Some rates are beginning to increase.  With a 12- or 24-month certificate, you can take advantage of rising interest rates while still leaving yourself the flexibility to re-invest once interest rates rise again.

4. Refinance your debt

The service charges on several kinds of debt are tied to the prime rate. Notably, credit cards and private student loan rates may increase as the prime rate continues to climb. That makes now a great time to think about refinancing or consolidating your credit card balances into a fixed rate loan.

Take advantage of currently low interest rates with several strategies. A home equity loan can help bundle your high-interest, unsecured debt with your low-interest mortgage. A personal loan for refinancing can also help secure a better interest rate. Other options exist, and the sooner you speak with a financial professional, the better off you’ll be.

With all of the financial terminology surrounding news events like rate hikes,  it’s best to have an advocate in your corner to help you figure out what to make of a changing economic landscape. Genisys Credit Union can do just that!  Contact your local branch and let us help put you on the path to financial wellness.

© Genisys Credit Union and www.genisyscu.org, 2017. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.

 

Sources:
http://www.azcentral.com/story/money/business/consumers/2017/01/19/bit-bit-rising-interest-rates-making-impact/96560462/
https://www.nytimes.com/2017/01/18/your-money/increases-in-interest-rates-on-savings-accounts-remain-slow-to-materialize.html?_r=0
http://www.usatoday.com/story/money/personalfinance/2016/12/28/what-2017-may-mean-your-personal-finances/95736736/

 

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