Interest Rates Up! Up! And Away
What you're about to read is the result of ongoing interaction over years with several Comsumers like you. They are also interested in what is up with interest rates.
This article was written to answer some of their frequently asked questions and address common issues about interest rates. And like them, I hope you'll find this information helpful too.
Interest rates have been at their lowest levels in over 40 years. U.S. buyers have been able to purchase previously unaffordable homes, cars and other toys. Many have used cheap home equity loans to remodel, take vacations and pay off credit cards. Students have taken advantage of the rock-bottom student loan rates.
But, interest rates look to be headed up. Alan Greenspan and the Federal Reserve escalated the Fed funds rate last week to 4.75 percent for the 15th straight time since mid-2004 in a bid to head off inflation. But it said more rate hikes may be needed, warning that price pressures could build if the labor market tightened further. So, what does that mean to you and me?
The increase in rates is important if you have variable (not fixed) loans. For example, if you have adjustable rate mortgage or home equity lines of credit, the interest rates will probably go up (as well as the payments) in the next few months. Each time the Fed increases the Fed funds rate, it will roll down onto your adjustable rate loans and your payments will go up. The speed of increase and the amount of the increase will depend on what index your loan is based on - check with your lending institution for more information on that.
If you have high credit card debt, the situation may be even more bleak because credit card rates remained high while other rates have been incredibly low. The Fed increases are a good excuse for your credit card company to hike your rates even higher.
So, what can you do if you're looking at rates and payments going up, up and away?
* Your payment increases may be fairly gradual. Depending on the economy, the Fed will continue to increase rates although they have signaled that the increases are likely to be very gradual. If the economic or political situation changes, they always have the ability to lower rates again.
* Check with your student loan lenders to see about consolidating and locking in rates. Good news: interest rates on savings are also likely to increase! So, if you have CD's coming due, check with different financial institutions before automatically rolling them over. If you have money stashed in savings accounts, the rates are probably starting to creep up.
* If you've been thinking about re-financing, there are still some good deals out there and there's no sense in waiting any longer.
* What if a new house isn't in your plans for a couple of years? When rates go up, it often cools off real estate prices and balances out the higher rates. Continue to save money in the highest interest short-term accounts you can find (no stocks or other long-term investments). Rates will probably not take huge leaps in the short term.
* If you have an adjustable rate (home or home equity or car loans), you will see higher payments so call your lender to find out what the new payment is "likely" to be. They'll probably put all kinds of disclaimers out about not really knowing, but try to get a worst case scenario and then start pretending you really do have that new payment. Put the extra into a special savings account so you'll have a "slush" fund to cover if you run short one month. At the same time you are building up a cushion for the future, you'll have a good idea of whether or not you can handle the new payment. The time to start looking at other alternatives like cutting back, increasing income or even refinancing.
Yes, surprising as it may seem, it really is this simple to find the most valuable information you've been looking for on interest rates. And there's more to learn Read on.
Remember, if you refinance your existing term to a new 30 year term, you'll have lower payments, but you'll pay a lot more for your house because of the additional interest.
* Call your credit card companies and see if they are willing to lower your rates (not all are). Look for good, permanent credit card interest rates that you can transfer higher rate balances to. For example, if most of your cards are 18% or higher, find a good 12% card or lower and transfer as much as you can to that. Playing the 0% credit card shuffle is a dangerous game and can hurt your credit score.
* Reduce credit card debt now! Stop using your cards and pay more than the minimums. If you pay off one card, take that payment and put it on another card. If you receive a pay increase, put it on the cards. The sooner the cards are paid off, the more flexibility you'll have!
We are quite likely to enjoy reasonable interest rates for some time to come. However, make preparations now and you'll be able to handle whatever comes your way.
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