The Federal Reserve announced in December its highly anticipated first interest rate hike since 2006. The new rates can have an impact on your finances, which is why it's important to be prepared. Here are five rules for living in a world of rising interest rates.
5 rules for living in an economy with rising interest rates
January 30, 2016 at 8:00PM
Run the numbers before you decide
"You should no longer make assumptions that mortgage rates and student loan rates are always going to be lower than potential investment growth rates," said financial writer Julie Rains. That could upend how you view investing in the stock market vs. accelerating your mortgage payment.
Switch to a fixed-rate mortgage
If you took advantage of the historically low interest rates by getting a variable-rate mortgage, you're likely to see your monthly mortgage payment increase. You can rein in potential increases to your mortgage payment by refinancing. "Lock down all debt into the form of fully amortizing, fixed-rate mortgages," said FinancialMentor.com's Todd Tresidder.
Shop carefully for new credit
On the day the Fed announced the rate increase, several major banks announced increases to their prime lending rates. Rising rates impact the interest rates on credit cards, mortgages and other types of loans. Shop around when looking for a new loan or credit card — not only for the rate, but also the terms.
Don't dismiss bonds as an investment
Much has been written about how rate increases will hurt bond investors. However, several other factors influence bond prices — including the maturity of the bond, the coupon rate of interest and market factors, such as supply and demand. Bonds also provide stability in an investment portfolio.
Watch for housing market changes
As mortgage interest rates go up, home buyers are unable to afford as much home. This can ultimately impact home sales and the construction of new homes. The potential for reduced homebuying power might be incentive enough for consumers to move more quickly when listing their home and looking for a new one.
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