Rising Interest Rates and You
If you happened to click through any financial news in mid-December, you might recall seeing a fair few headlines about the Fed raising interest rates.
And if it all sounded like unintelligible economic jargon to you, take a look below for a few key points!
With any luck, you’ll understand those headlines a bit better, and you might just be able to drop a few clever-sounding financial tidbits at your next happy hour get-together.
1. Why do rates go up and down?
Briefly, the Fed’s key interest rate correlates with the strength of the economy. Back during the recession in 2008, the Fed put interest rates at zero to help revive the economy. Now that the economy is no longer in crisis mode, it can handle increasing rates.
2. Why does this matter to me?
Credit card debt is already an expensive pain, but when interest rates go up, the annual percentage rate (APR) you pay on your credit card balance typically goes up too.
This increase is likely to hit more immediately than other effects of the interest rate hike, so now may be a good time to pay down those credit card balances.
Student loans may also be affected. Those with a fixed-rate loan will not see any change, but interest rates on private, variable-rate loans will likely increase, and those who will be borrowing for college in the near future may see a raise in rates for new loans.
Mortgage rates are not as sensitive to fluctuations in the federal funds rate as short-term borrowing can be. And while a hike in interest rates does not always mean an eventual increase in mortgage rates, that outcome becomes more likely when more interest rate rising is predicted. With three more rate hikes expected for 2018, mortgage rates may be effected.
3. What does this mean for real estate?
Simply, there is an inverse relationship between mortgage rates and housing prices. When one goes up, the other goes down.
If the interest rate increases begin to raise mortgage rates, it may become more difficult for home-buyers to afford a new house, and with fewer qualified buyers out there (essentially equating to less demand for homes), housing prices will have to fall.
So if you’re looking to purchase a home in the near future, it may behoove you to buy sooner than later, while mortgage rates are still low.
And if you’re considering selling your home, the increasing interest rates could predict a lower sales price if you wait too long to put your home on the market.
4. Do I need to freak out?
Let’s be real: probably not!
One rate increase is not likely to financially break anyone, but with more increases predicted for the next year, it might be a good idea to stay on top of how you could be affected.