For several years before 2005, interest rates were at historic lows, enticing people to spend more on credit. When interest rates rise, what do higher rates do to your personal finances? When you hear of the possibility of rate hikes by the Federal Reserve (the Fed), is there anything you should do to prepare?
When the Fed starts pushing up the interest rates, credit card debt, mortgage rates and rates on car loans are affected. The average U.S. household debt, according to the Fed, is $20,000, not including mortgages. Most of that debt is credit card debt, so people with this type of debt will be affected most.
If you’re struggling to pay your credit card bills each month or you can only afford the minimum payment, even a small rise in rates could pose a problem.
Over time, as the rates gradually continue to rise, more of your monthly payment will go toward interest and less toward paying off your principal balance. The result will be a longer payback period and more of your hard-earned dollars to pay it.
If you have an adjustable-rate mortgage, depending on how long you plan to stay in your home, you may want to consider refinancing to a fixed-rate mortgage if rates are expected to rise.
Or now may be the time to enter the market if you are looking for a new home because as rates rise, you may not be able to afford the home you want. As mortgage interest rates rise, you’ll be able to afford less house for your money. In either instance, one of our Mortgage Consultants can walk you through the process to determine if it makes sense to refinance or how much house you can afford. Be sure to research real estate trends in your area so you don’t buy during a period of inflated home prices. And best of luck.
