April 13, 2022
The news is filled with talks on “interest rates going up” and the Federal Reserve “raising rates,” because they are - but what does this actually mean for you? The Federal Reserve, the central banking system of US government and it is taking action to make it more expensive to borrow money. They did so as part of their plan to slow down inflation, or price increases, within the economy. (3)
In a nutshell, what this means is that every time anyone borrows money, it is more expensive. A mortgage, a car loan, even credit card debt is more expensive than it was just a few months ago. For many people, the largest debt they hold is their home mortgage and even the smallest increase in your home mortgage rates can have a large impact on your monthly payment. We’ve seen the average mortgage interest rate increase from about 3% at the beginning of 2022 to about 5% this month. This higher rate can add a couple hundred dollars to your monthly mortgage payment if you buy a new house. (1)
The good news is, most existing mortgages are not affected by these rate changes; If you have a fixed-rate mortgage, as most current homeowners do, your rate is set at a steady, predictable rate throughout its term. However, if you have an adjustable rate mortgage, it may increase in cost, though typically there are limits to how much and how often your payment will increase. Also, if you were considering refinancing your mortgage, the higher rates can make that a less attractive option.
Compared to a year ago, it is more expensive to buy a house, more expensive to purchase a new car, and more expensive to swipe that credit card.
The Fed plays a decisive role in setting interest rates across the economy, but not all loans react in the same way to its actions.
Interest rates on some debt, such as credit-card balances and the kind of loans private-equity firms use to buy companies, rise in tandem with the fed-funds rate. Rates on those loans haven’t increased much yet. The Fed has raised its benchmark rate this year by only a quarter of a point, to a range between 0.25% and 0.5%. (1)
Even though everything else is more expensive, we are confident that the interest rates your bank account is paying on your savings is unlikely to go up meaningfully. It is important to understand the impacts these rising rates may have on you and options you have to help maintain your purchasing power over time.
Contact me to learn more about how to make these rising rates work for you and your short-term and long-term investment goals.