In September the Federal Reserve raised its benchmark fed funds rate to 2.25 percent, and has indicated it will further increase this interest rate to 2.5 percent in December 2018, 3.0 percent in 2019, and 3.5 percent in 2020. How will this affect you? The Federal Reserve rate hikes mean banks will pay you a higher interest on your savings. But they will also charge you more for loans. Here are six steps to take now while interest rates are on the rise.
1. If you need to buy a house or refinance, now is the time. Interest rates on mortgages are going up and will continue to increase over the next few years. Here in the Puget Sound region, housing prices are not expected to decrease enough to offset larger house payments driven by higher rates. If you have an adjustable rate mortgage, you may want to refinance into a fixed rate.
2. If you have a home equity line of credit, consider paying it down and using less of the available funds, or plan on having a higher monthly payment.
3. Obtain consumer loans soon. If you need financing to buy a car, appliances, or furniture, your best interest rates are right now.
4. Pay off any outstanding credit card debt. Your interest rate will go up over the next two years as the Fed raises rates.
5. Talk to your financial adviser about the amount of bond funds you are purchasing. When interest rates are rising, new bonds may seem more attractive as they pay a higher yield. Bonds can be part of a diversified portfolio as a hedge against an economic crisis, however there are other investments that will likely generate higher returns while the Fed is raising rates.
One thing we know for certain is that the economy is ever-changing, and it pays to adjust your strategies accordingly. We’re here to help you navigate the economy as it relates to your personal financial situation. At Penny Lane Financial, our goal is to help you stay on the path to better investing.