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FINANCIAL FACT: What you should keep in mind when interest rates rise

In an effort to curb the highest inflation in decades, the US Federal Reserve (the Fed) recently increased its key short-term interest rate. 

The Fed is expected to increase the rate in small increments several times this year to bring them back to pre-pandemic levels. Here are some things to keep in mind when interest rates begin to climb.

When interest rates rise, banks charge customers more to borrow money.

  • Variable loan rates also known as adjustable-rate loans rise. Loan payments will increase as interest rates rise. Examples may be mortgage loans, personal loans, or auto loans. When interest rates are rising you may want to convert a variable rate loan to a fixed rate loan or pay off the adjustable-rate loan sooner if possible.
  • Mortgage rates rise. This affects homebuyers more than homeowners with existing loans. Homebuyer’s costs will increase as interest rates go up because you are paying more to borrow. If you have a fixed rate mortgage loan, your interest rate remains the same for the term of the loan 15 years, 30 years, etc. If your mortgage loan has an adjustable rate, the rate will change when the term is up, common adjustable terms are 3 and 5 years.
  • Credit card rates may rise. If your credit card has a variable annual percentage rate (APR), you will typically see your rate rise as the prime rate increases. Consider paying off your balance when you first see the interest rate increase.
  • Your credit score may drop. Higher interest rates may cause individuals and families holding mortgages and credit card debt to struggle as payments rise, possibly leading to missed payments and delinquent accounts.

On the other hand, when interest rates rise, you have the opportunity to earn a higher rate of return on your savings.

  • Certificates of Deposit (CDs) and savings accounts offer better annual percentage yields as interest rates rise. It pays to shop around for the best rates. Larger banks may not be increasing their interest rates because they are flush with deposits and do not need to attract new customers. However, the online banks who want to retain accounts and attract new customers may be offering better rates and increasing them as the Fed rates go higher.
  • Money Market account returns rise. Like savings accounts, money market funds can see a greater rate of return following an interest rate hike. Typically, a money market account offers a higher rate of return than most checking or savings accounts.
  • Bond markets tend to fall as interest rates rise. So, if you already own bonds, the price of your bonds will fall. If you are in the market to buy bonds you will benefit, especially if they are short term since prices have fallen more than usual relative to long-term bonds. Normally, they move lower together.

Keeping the above information in mind may help you benefit from higher interest rates and protect yourself from any negative effects.

 

A Message From Our CEO MMBB and your Retirement Assets Key milestones for retirement planning How credit card debt affects your credit score More ways to follow MMBB . . . FINANCIAL FACT: What you should keep in mind when interest rates rise
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Translations of any materials into languages other than English are intended solely as a convenience to the non-English-reading public. We have attempted to provide an accurate translation of the original material in English, but due to the nuances in translating to a foreign language, slight differences may exist.

Las traducciones de cualquier material a idiomas que no sean el inglés son para la conveniencia de aquellos que no leen inglés. Hemos intentado proporcionar una traducción precisa del material original en inglés, pero debido a las diferencias de la traducción a un idioma extranjero, pueden existir ligeras diferencias.

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