5 money moves you need to make before the Fed hikes interest rates
A two-year era of record-low interest rates is coming to an end, perhaps as soon as next month. The clock is officially ticking, both for borrowers and savers.
The Federal Reserve is weighing when it will start raising the federal funds rate this year and how aggressively it will do so in a bid to tame inflation, which is at a 40-year high. In a statement after the central bank’s monetary policy meeting in January, Fed officials said a strong labor market and high inflation warranted a rate hike “soon”. Traders see a greater than 95% chance the Fed will do so at its next meeting in mid-March.
The first rate hike is symbolic; it marks the end of the near-zero interest rate environment that the Fed instituted in the early days of the Covid-19 pandemic. More significantly, policymakers are likely to hike rates further this year. Several Wall Street banks are projecting a total of five rate hikes that would take the federal funds rate up to 1.5% by the end of the year.
What does that mean for you? There’s one potential item on your personal finance to-do list that you might want to address ahead of the next Fed meeting. In general, however, you have some time to prepare your finances. “You don’t have to shoot from the hip and make hasty decisions,” advises Robert Gillliland, Concenture Wealth’s managing director and senior wealth advisor.
Below, in order of priority, are five smart money moves you might want to consider.
1. Refinance your mortgage
Interest rates are rising, although no one knows exactly what they are, so borrowers should take advantage of record-low interest rates now. “The window is closing for homeowners to be able to refinance at these rates,” Gilliland says, adding that he still encounters clients who have mortgages with interest rates above 4%. The interest rate on a 30-year fixed-rate mortgage is currently 3.55%, according to Freddie Mac.
Looking for a mortgage refinance option can save you a lot of money in the long run. According to a study by Black Knight, a mortgage data provider, nearly 6 million qualified homeowners who have at least 20% equity in their home and a credit score of 720 or higher could save an average of $275 per month.
Homeowners with an adjustable rate mortgage could potentially save even more money right away – the interest rate on a 5/1 adjustable rate loan is currently 2.7% – although you should also consider the risk when that term expires and the Interest rates are likely higher, Guilliland says.
A rate hike or two probably won’t improve your budget, but a 0.25 percentage point difference can add up for someone with a $500,000 mortgage, notes Alec Quaid, a certified financial planner at American Portfolios. While house prices are high in many parts of the country, borrowing rates are only getting higher — and that was the push he and his wife needed to finally “bite the bullet” and buy their first home in the state earlier this year Denver area for sale.
“I don’t think anyone who isn’t able to buy should buy just because of this rate hike, but if you’re wishy-washy and want to potentially buy and are able to buy, this could be a big kick in.” Butt,” Quaid says, adding that waiting another year to buy could result in mortgage rates more than 1 percentage point higher.
2. Pay off high-interest debt
next up? Manage debt with adjustable interest rates, such as B. Credit cards. If you’ve been adding to your savings over the past two years, as many Americans have, now might be a good time to use your savings to pay off high-interest debt, Guilliland recommends.
When lending rates rise, anyone who doesn’t pay off a credit card in full can find themselves further behind, he says. “A $1,000 payment will pay back less of the principal you owe.”
And if you’re one of the more than 43 million Americans with student loan debt, consider refinancing at lower interest rates. But other factors make that decision a bit more difficult, with the forbearance on student loan payments expiring in May and the prospect of broad forgiveness, Quaid says.
If you have federal debt for student loans, think carefully about refinancing into private loans because you’ll lose out on some benefits — like the option for an income-based repayment plan, Quaid says. “It’s easy to chase the lower price because it looks better, but you still need to peel off a few layers before making a decision based solely on prices.”
3. Consider upcoming big purchases
Quaid was already considering buying a home, although the prospect of higher borrowing costs hastened that decision. When thinking about other big spending decisions, the prospect of higher interest rates is just one of many factors to consider, he says.
Guilliland agrees that one shouldn’t rush into big spending decisions — like buying a home or a car. Still, the timing of this purchase could play a role. “Find out where the funding is today and where it could be in the future.”
4. Adjust your investment portfolio
Don’t wipe out your savings entirely because you might want to invest that money in the stock market — or to avoid making a “bad” decision like selling in the middle of an already volatile time in the markets, Guilliland recommends.
Now is also a good time to review your portfolio, Guilliland advises. For example, opt for shorter-dated bonds to avoid being locked into low interest rates for long, and consider investing in stocks of financial companies because rising interest rates are “really, really good” for this industry. he adds.
More broadly, there may be opportunities to buy stocks at lower prices. “Volatility can be hard to take in the short term, but it’s your friend over the long term,” says Quaid.
5. Look for a better savings account
Once the Fed starts raising rates, savers will be able to make more money on their deposits. Quaid encourages all of its clients to choose a high-yielding savings account, especially an emergency fund. While higher interest rates are a nice bonus, the real goal of this money is to have cash on hand when you need it, he adds.
Even with the prospect of several rate hikes this year, savers need to be patient. “It will be some time before higher interest rates affect money market and savings accounts,” says Guilliland.
Finally, remember that while rising interest rates and higher inflation can be the issues of the day, you need to understand how a broader trend is affecting you before taking action, advises Quaid. “It’s easy to get caught up in hysteria, but not everyone should.”
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