Top 6 Things to Know About 2018 Rising Interest RatesJune 14, 2018

Rising Interest Rates

The Fed is forecasting that the economy will continue to grow 2.5 percent in 2018. What does the mean? The Federal Open Market Committee will continue to raise interest rates in 2018, and they may raise the rates four times.

If you are saving money, your rates will increase to your advantage. If you are borrowing, your rates will go up costing you slightly more in the long-term.

Interest rates are still considerably low when you compare to the 1980s when the average fixed mortgage was 18 percent.

With the predictions of rising interest rates this year, how will does this affect potential borrowers. Read on for the top six things to know now.

What Is a Federal Rate Hike?

The federal funds rate determines the rate that banks lend reserve balances to different banks. It affects both financial and monetary conditions of the U.S. economy.

The fed fund rate is determined by the economy’s growth, employment rate, and inflation. The fed fund rate also determines short-term interest rates for loans such as car loans, credit cards, and mortgages.

The rate was near zero after the 2008-2009 recession to encourage consumers to buy. Since this time, the Fed has continued to increase the rate. In 2017 alone, there were three rate increases of .25 percent to make the rate 1.5 percent.

In March, the Fed increased another quarter percentage point to 1.75 percent.

As of now, the Feds may increase rates two more times (or more) in 2018. They cited a strong outlook for the economy. This means these rates could continue to rise in 2019 and 2020.

So, what does this mean to you? Let’s examine each of the main finance categories to determine how it will personally affect your finances.

  1. Stocks Could Decline for a Short Period
    Interest rates affect the prices of stock. It is not uncommon to see market volatility after a rate increase. Usually, these are temporary.

    Companies may slow down expanding businesses because of the higher costs of borrowing. This can ultimately take stocks down slightly.

    Don’t be surprised if your retirement portfolio goes down slightly. Fixed-income investments may also decline.

    No need to worry if you don’t plan to retire anytime soon. This is a cycle.

    Bonds are sensitive to the Federal Reserve interest rate increases. Equity market has grown in the past because of the economic growth.

    You should sit down with your financial planner to be sure your portfolio is diversified and analyze your assets.

    There may be more of an impact depending on what kind of loans and products you have. Be sure to optimize your finances, or consider discussing if there are any stocks to buy now with your financial adviser.
  2. Personal Loan Interest Rates Could Increase
    Most loans won’t increase significantly. A slight rise in the federal rate shouldn’t affect car loans. If rates continue to increase, personal and auto loans may follow suit.

    If you plan to get a car in the next few years, you should keep an eye on the market and check out the forecast.
  3. Interest Rates on Bank Deposit Accounts Will Not Likely Change

    You may think that the rate increase means you may be more money in your savings account. You probably haven’t seen much change.

    Savings rates usually rise at a slower pace than the borrowing rates. If rates keep increasing, banks may eventually raise deposit accounts. Shop around to see if any banks have raised their rates higher than you currently have.

    Banks need to be competitive, so keep your eyes open.

  4. Credit Card Interest Rates

    Most credit card interest rates are variable and can change with the rate increase. However, it will not be a large spike.

    The Credit CARD Act of 2009 prevents financial institutions from raising rates on current balances unless you have missed two payments in a row. They are also required to give consumers a 45-day notice before increasing rates.

    Your rates could increase for future purchases if your rates are variable.

  5. Student Loan Rates Won’t Spike
    Don’t worry about student loans. You should not see an increase in your monthly payment.

    Federal loan rates are fixed, so they can’t change. Only loans with variable rates will change.

    If you have a different loan for your student loan, such as a personal loan, you may want to consider refinancing to a fixed term to save money in long run.
  6. Mortgage Interest Rates May Increase
    It’s impossible to say if the rate hike will directly impact mortgage rates. It could raise rates for adjustable-rate mortgages and home equity lines. These types of loans are more sensitive to these rate increases.

    The previous Fed rate did change conventional 30-year fixed rate mortgage, which now is around 4.61 percent. This rate matches the highest level since May 19, 2001.

So What Does Rising Interest Rates Mean to You?

You should consider any large purchase financing now to help you save money in the future.

If you plan to be in the market for a mortgage, now is the time to apply. Rates will most likely continue to rise.

You can calculate online payments to see what your mortgage would be and get personal quotes.

You should factor in closing costs which average around 2 to 5 percent of your purchase price. So if your home was $200,000, closing costs would range from $4,000 to $10,000.

According to a recent survey, buyers paid about $3,700 in closing fees on average. Of course, it depends on the type of home you buy.

You can also sign up for Spencer’s Rate Watch, so you let Spencer Savings Bank keep track of the mortgage rates.

You won’t have to constantly check. You will get an e-mail with the current rate regularly.

Looking for a Mortgage?

Spencer offers various mortgage options to meet your needs. You can also pre-qualify for your loan today if you are ready to purchase a home.

Don’t let the rising interest rates affect your purchases. You can plan now to save money in the future.

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