6 Ways Interest Rate Increases May Affect Your Personal Finances
The Federal Reserve is continuing to raise interest rates to combat inflation. It’s raised rates more times already than it has in 28 years. You would think then that as inflation eases, it would make expense management a bit easier for consumers. However, as rates rise, so too does the cost of borrowing money – with everything from home loans to credit cards – continuing to go up. Here are some areas you might want to keep an eye on in your finances, according to GoBankingRates.
Mortgage Loans and Re-Fis
So with this topic, unless you have an adjustable-rate mortgage or are in the market to buy a home soon, the rate hike should not affect your current fixed-rate mortgage. On the flip side, eventually, mortgage rates for new mortgages and ARMs will jump up. Should a refinance be a part of your future, now might be a good time to do so while interest rates are still lower and home prices are high.
If you had hoped to buy a new homestead, all is not lost. As rates jump up, we should see home prices begin to drop.
When it comes to the plastic in our wallets, credit card companies have to give consumers 45 days’ notice before opting to raise rates or increase fees. So any potential higher monthly payment shouldn’t come as much of a shock. You may wish to use that time to shop for a balance transfer card with a 0% intro APR to chip away at the revolving debt. Generally, higher interest rates will take one or two statement cycles to appear on bills.
With federal student loans having a fixed interest rate, current borrowers won’t have to worry about a rate hike. However, in the future, borrowers could be staring at having to pay 1.5% to 1.9% more for borrowing money for college.
Similar to fixed-rate mortgages and student loans, if you have a current car loan, there is no need to worry about your monthly payments jumping up. If you’re buying new or used and applying for a loan, expect to have to pay more to borrow money.
While interest rates on savings accounts, certificates of deposit, and money market mutual funds have usually been paltry, there should be an increase in the coming months, but gains will probably be small. Generally, money market account yields tend to rise faster but don’t exactly provide the best ROI.
Stocks and Bonds
Finally, even though most significant markets are bearish for now, any interest rate hike effect on stocks will be minimal. Bonds might also fall as interest rates jump up. However, if you own bonds as a part of your portfolio, mutual funds, in particular, will reinvest the money to rebalance your portfolio, which should result in higher yields.
“You have to absorb those price losses in the near term, but over the long run, you could end up with higher returns,” said Andrew Patterson, senior international economist with Vanguard.