Rising interest rates: Going up may be a good thing
What might a rate hike mean for your financial goals? Having a better understanding of the good and bad of rising interest rates—especially in the current economy—may actually help you with your decision making.
When the Federal Reserve increases the federal funds rate, the effects move through the financial system. This can trickle into areas of your own personal finances impacting your mortgage, credit card rates, investment portfolios and savings accounts. But there’s also an upside:
- Gradual increases will generally take time to make a large impact on your wallet.
- 30-year mortgage rates are still relatively low compared to 10 years ago, which might open up options for you to either buy a home or refinance your current mortgage.
- Creating a balanced mix of investment options in your portfolio may help you maximize any positive market impacts.
- Rising rates may mean more money back for you through traditional savings options. However, the effects will probably be minimal. Online savings accounts, community banks or credit unions may provide you with more options to earn almost a full percentage—almost ten times the interest you’d earn through traditional options.1
- Rebalancing your investment options when interest rates rise may help keep them in line with your long-term goals.
30-year mortgage rates are still relatively low compared to 10 years ago
The other side of rising rates
While there’s some good that can come with a rate hike, there can also be less desirable impacts:
- You may see the housing market slow as borrowing large amounts of money to buy a house becomes more expensive.
- You’ll likely see credit card rates ticking higher and your monthly payments becoming more expensive. A best practice—start making aggressive steps toward paying down high-interest debt once and for all.
Remember, the Federal Reserve raises interest rates with the intent to keep a thriving economy. Once you understand this, a rate hike doesn’t need to send your heart rate soaring. It’s generally a good idea to ignore the market chatter and keep your focus on fulfilling your long-term financial goals!
1 CNBC. (2017). How the Fed rate hike will affect your finances. https://www.cnbc.com/2017/06/14/how-the-fed-rate-hike-affects-your-wallet.html
* Sources include “30-Year Fixed-Rate Mortgages Since 1971” as featured on freddiemac.com and mortgage payments based on a loan of $150,000 at 30 years.
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