How Changing Interest Rates Will Impact Your Personal Financial Strategy

You may have heard that interest rates are changing. When the Federal Reserve decides to either raise or lower rates, it’s not cause for panic, but it can be a time to review your accounts. Mainly because these changes can impact credit cards, mortgages, home equity lines of credit, auto loans and even student loans.

While things like a quarter percent interest rate increase may seem minimal, it may have an impact if you have multiple adjustable-rate products or debt that is approaching a due date. The first thing you, as a consumer, should think about as rates start to fluctuate is what can you proactively do to protect yourself and your credit?

First, understanding interest rates, particularly short-term rates, and why rates matter is essential. The Federal Reserve may increase interest rates, primarily impacting short-term rates, and subsequently the cost of borrowing money, when the economy is strong. For example, a rising rate environment may make the cost of repaying any debt more expensive, while a lower rate environment may make a cost of repaying any debt less expensive.

Let’s take a look at two types of rates:

• Short-term rates are rate increases that last for less than a year
• Long-term rate increases last two-plus years

There are a few things you can do to prepare for interest rate changes in the future. For instance, here’s what to watch for if short-term rates begin to rise again:

• A rate increase primarily impacts short-term rates and short-term credit, so any lines of credit such as credit cards are at risk of increased pricing.
• Accounts such as adjustable-rate loans and lines of credit will have rate increases, which will impact your monthly budget as you will be paying more in interest.

By looking at the amount of debt you have and your current interest rates, you can determine how much you’ll be impacted by a short-term rate increase. With this knowledge in hand, you will be better prepared to research alternatives to protect yourself from the impact of rising rates on your wallet and bank account. Here are suggestions for where and how you can make adjustments:

 

Credit cards

Credit cards may be one of the easiest to fix if you find that your rate jumps. Research other low-interest rate cards or switch to a card that has a zero interest rate and make sure you find out if there is a fee for transferring your balance. Be sure to know when the zero interest rate period ends and what the rate will adjust to before transferring any balances.

 

Mortgages and Home Equity Lines of Credit

If you have a mortgage, it’s important to understand the structure of the loan - is it adjustable or fixed? For example, is it a five-year or 10-year fixed rate and then it converts to an adjustable rate? Determine your current rate, when it adjusts and the cost of refinancing your mortgage from an adjustable to a fixed-rate offer. You should also know:

• Home equity lines of credit (HELOC) are always variable while home equity loans are fixed.
• It is illegal to have a prepayment penalty on home mortgages, but not on home equity lines of credit. It is best to make sure you won’t be penalized for pre-payment by checking with the issuer first.
• If you are in the market to buy a house, rising rates will mean the amount you will pay monthly on your mortgage will go up, therefore the amount of house you can afford to buy will go down. Pro tip: It’s always better to put as much money down as possible, but if you put at least 25 percent down you may get a better rate.
• If you have a HELOC, your rate is likely adjustable therefore it may change should interest rates as a whole change. The less you owe on your HELOC, the better your monthly payment will likely be, so it may be time to look into whether you should start paying down the line. Another option to consider is converting to a fixed-rate loan. Depending on your balance, whether you need access to cash and the cost to refinance, you may decide to stay the course. The cost of refinancing a HELOC could end up being more than what you would pay in additional monthly payments on the existing adjustable-rate line. 

Other loans/debt:

Similarly, if you have an excessive balance on your student loans or multiple credit cards with outstanding balances, it could make sense to consolidate those debts into a HELOC. HELOC rates are typically lower than credit cards, but the rate is adjustable. Again, the deciding factor should be the amount of monthly savings you will receive by consolidating and the cost of consolidation. A financial advisor could help you weigh the pros and cons.

 

While there’s no real way to know exactly how much rates will change, the most important thing to be aware of is what the current rate on your mortgage and other loans is, whether that rate is adjustable and how an increase in rates will impact your monthly bills. To determine whether it makes sense to switch from adjustable to fixed-rate loans, consult a Rockland Trust Bank advisor who understands your personal banking needs.