The Federal Reserve has made it clear that it plans to raise interest rates in 2017. In fact, as of this writing the plan is to raise interest rates 3 times this year. Each raise is expected to be just a quarter of a percent (0.25%) but by the end of the year, interest rates will be around one and one half percent (1.50%) assuming nothing major happens and they stick to the plan.
What does this mean for you and your money? How will rising interest rates impact your wallet? We will look at both loan and savings products as these both react differently. The goal is for you to see and understand the impact so that you can make any moves now with your money that you might have been holding off on.
What Do Higher Interest Rates Mean?
When interest rates rise, it costs more to borrow money. Banks get charged more for borrowing money and they pass this cost on to the borrower, which is you. When it comes to savings accounts, the interest you earn will be more as interest rates rise.
The other difference is the timing. On loans and other debt products, interest rates will rise almost immediately, reflecting the increase. But for savings accounts, the interest rate will be slow and you might not see higher rates until later this year.
When it comes to home loans, it’s a mixed bag. If you own a fixed rate mortgage, you are in the clear. Your rate is locked for the entire length of your term. If you have an adjustable rate mortgage however, you will see an increase in the rate.
On a loan of $200,000 you could be paying an extra $85 a month if the Fed follows through and raises rates by three quarters of a percent (0.75%) this year.
What if you are in the market for a loan or a refinance? Interest rates have already risen for fixed rate mortgages since they are tied to the 10-year Treasury yield. For adjustable rate mortgages, the same scenario applies here as above.
And if you have an equity line of credit, you will see the interest rate rise on this product quickly after rates are increased. But with the rate increases being so small, the overall impact on you may not be severe.
The bottom line is that it is getting more expensive to borrow money for a house. But the increase shouldn’t have a large impact on the house you can afford, assuming you are not trying to buy too large of a house.
Even though car loans are a debt product and will rise, there is a lot of competition between car manufacturers. You see this with many offering zero percent or 0.90% financing offers on new cars. As rates rise, so too will the rates on auto loans, but they will still be manageable. And if you haven’t been shopping for a car lately, you probably won’t notice the small increase in rates from 0.90% to 1.90%.
For used cars, the interest rate will rise here as well. But the impact won’t be large and you shouldn’t really notice an impact on the overall interest you pay on the loan.
Therefore, the same idea applies here as it does for house buying. The small uptick in interest rates shouldn’t determine whether or not you can afford a car. If it does, then you are looking at a car you simply cannot afford.
Since this is a debt product, you will see your interest rate increase by the next time you get your statement. Of course, as long as you pay your balance in full each month, rising interest rates shouldn’t have an impact on your or your wallet.
But if you don’t pay your balance in full, don’t despair. Because of the slow, methodical plan to raise interest rates, you probably won’t notice the increase all that much. The extra interest you are charged may only be a couple dollars more per month if your balance isn’t very large.
This isn’t to say you shouldn’t act however. You should be striving to get rid of your balance as quickly as possible so you can start using your money to grow your wealth. Consider a balance transfer as a potential option. Right now you can still get 0% balance transfers. With interest rates rising however, it is unclear how long these offers may last.
With savings products, you will start seeing a rise in the interest you earn later this year. After all, a bank is a business. They want to get more money now (raising the interest they charge on loans) and keep it by taking their time to increase the interest they pay you on savings.
Even with a rise in interest rates, don’t expect anything amazing. Most savings account interest rates will rise 0.10% – 0.20% with the higher increase for online banks.
That is your best option when it comes to earning more money. Move your savings to an online bank and earn more money. The switch could be the difference between a 0.10% interest rate at a brick-and-mortar bank and a rate of 1.00% at an online bank. That is what the spread is now and it will increase a little more as interest rates rise.
On savings of $5,000 that is the difference between earning $5 and $50 interest over the course of a year. That is a big difference.
Even though small interest rate hikes like these don’t look like that big of a deal, they can have an impact on your purchasing power when it comes to loans and how much interest you earn on savings accounts.
Luckily, this impact is small assuming you are buying things you can afford. Otherwise the impact to you is going to be great.
While it isn’t necessary to have a complete understanding of how interest rates work and how a rising interest rate environment will impact the economy, it is important that you pay attention so that you can get the most from your money.