It’s no secret that there’s been much speculation in recent years about an impending rise in interest rates. While it’s pretty normal to get skittish at the thought, there’s also the possibility that a hike in interest rates could bring about a much-needed economic boost. However, in light of an impending adjustment by the Fed, there are some things you might possibly explore now, while rates are still low to get prepared for a rise in interest rates. Here are a few things to consider:
If the economy continues to improve, chances are good mortgage rates will go up, which means fixed rates on the standard 30-year mortgage will rise. If you’re buying a house, think about an adjustable rate mortgage (ARM) which is usually about one percentage point less than a fixed rate.
An ARM is an interest rate that is set for a certain number of years, and then can go up or down, depending on what the current interest rate is. Because of the short term of the fixed rate and the risk you might be taking when that term is up, the initial interest rate is lower. Consider an adjustable five-year ARM with a fixed rate for five years. When the ARM is up, you can decide what to do from there. Most of all, work with a mortgage broker who is a trusted ally on this front.
Home Equity Lines of Credit
Watch your home equity line of credit, which will usually rise within about three months after the time the Fed raises interest rates. As an aside, and having nothing to do with an increase in rates, be smart when it comes to your personal LOC. Don’t make the mistake of waiting to pay off the line of credit. Treat it like the debt it is and build it into your monthly budget, get it paid off within a reasonable time, and you’ll be glad you did.
When rates rise, old bonds become less valuable because they offer a lower yield than new bonds. Also if sold before maturity, they sell at a discounted price. In spite of this, bonds play an important part in a stable stock portfolio, so talk with your financial advisor and diversify in the way that is best for your unique situation.
Rates on credit cards are variable and will more than likely go up when interest rates go up—usually within about 60 days. If you get one of those handy offers to transfer balances to a new card with a defined period without interest, take advantage of that and try to pay off those cards within that time limit.
If you are thinking of buying a car, you might want to look for your financing from the auto industry. You will have better luck finding deals with them than with the banks and credit unions, who typically price their auto loan rates from the federal rate. Take some time and shop around for the car loan before buying.
Savings and CDs
Here’s an upside to interest rates increasing. The rates you earn on savings, money market, and CD accounts will also go up, which means you will make more from the money in your savings.
Be smart about how you purchase CDs in the coming months so that if rates go up, you can “ladder” these investments and buy CDs with a variety of different maturity dates, allowing you to reinvest as they mature and interest rates go up. Again, be sure and check with your trusted broker on the best investment strategy for your unique situation.
Treasury Inflation Protected Securities (TIPS) are bonds that are backed by the U.S. government and pay a fixed rate of interest twice each year, which also adjusts the principal in them. It’s best to purchase these when interest is lower, but buying some now might still be worth it. The best part of TIPS is you are guaranteed to receive at least the return on your full principal whether the rates go up or down. Ask your investment advisor or check out the government treasuries page.
Summing It All Up
Most importantly, it’s critical that you know and understand your position with regard to money. Having a firm grip on assets, liabilities, investments, understanding trends, working with investment partners who have earned your trust and performed well are all an important part of your formula for success, no matter what’s happening with the economy.
Do you have an investment plan and are you thinking about how a rising interest rate might affect that plan? Any thoughts on the suggestions shared here worth considering or things we’ve missed? We’d love to hear your thoughts on this.
Other resources on this topic:
The One Thing You Shouldn’t Do as Interest Rates Rise
How to Protect Your Retirement Savings as Interest Rates Rise