Interest rates are expected to rise in 2022 – here are 4 ways to prepare
With Goldman Sachs predicting that the Federal Reserve will raise interest rates by a full percentage point this year, you may be concerned that rate hikes will hurt your finances.
The federal funds rate, set by the central bank, is the overnight rate at which banks lend money to each other. It also affects the prime interest rate that lenders use to determine how much interest you pay on credit cards, mortgages, and other loans. When the federal funds rate rises, the federal funds rate usually follows.
Right now there are some money moves you can make while the reference rate is still floating around 0.08%. These won’t apply to every person, but here are four to consider.
1. Refinance your home loan
You could find mortgages with around 3% interest rates for most of 2021, but the Mortgage Bankers Association forecasts rates will rise to 4% this year, which could make monthly mortgage payments more expensive.
For a 30-year mortgage on a $300,000 home, the difference between 3% and 4% would be an additional $147 per month. Considering that the average interest rate on a 30-year fixed-rate mortgage rose to 3.68% this week, up 16 basis points from a week ago, you might want to commit to a lower rate now before they move even higher.
If you have an adjustable or adjustable rate mortgage that is already testing the limits of your monthly budget, you may want to refinance to a fixed rate mortgage to reduce the uncertainty of rising interest rates. But make sure you research the pros and cons of refinancing a mortgage before you decide.
Similarly, a home equity line of credit, or HELOC, is closely tied to the Fed’s benchmark interest rate, so you may want to look around and convert from an adjustable rate loan to a fixed rate loan if you have one.
2. Refinance your personal student loans
While private-sector borrowers are not eligible for the Biden administration’s payment and interest pause on state student loans, they have the option to refinance their loan at a fixed rate now before interest rates rise.
If you have a personal loan and are considering refinancing, “sooner rather than later you should pull the trigger to try and take advantage of current interest rates,” said Betsy Mayotte, president of the Institute of Student Loan Advisors, in a previous one Interview with CNBC.
3. Pay off your credit card debt
The average interest rate on credit cards is currently around 16%, but with looming rate hikes, those rates could be back up to around 17% by the end of the year, according to Ted Rossman, a senior industry analyst at CreditCards.com.
While this may add just a few dollars to your monthly payments depending on how much you owe, those extra few dollars could be an unexpected burden if you’re already struggling to pay your bills.
In that case, now could be a good time to review all of your debt consolidation options, including a balance transfer card or taking out a personal loan, and see what makes the most sense for you.
If you have federal student loan payments that have been suspended until May, you can use those funds to do financial household chores such as
4. Improve your credit score
Because lenders use your credit score to determine what interest rates you will pay on loans, the easiest way to offset benchmark interest rate increases is to improve your credit score.
Credit cards are a good example of how this works, especially since banks can raise their interest rates at any time provided they give you 45 days’ notice.
Let’s say you owe a balance of $6,194, the national average. With a good credit score of 660 to 719, you’ll pay $1,983 in interest alone if you make $200 in monthly payments, according to CNBC Select. That’s nearly $700 less than what you would pay in interest on a subprime credit score of 580-619.
To keep your credit score high, focus on paying off your debt and making timely payments on your outstanding balance each month. You can find more tips on improving your credit score here.
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