Interest rates have been at their lowest levels in over 40 years. U.S.
consumers 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. Recently, Alan Greenspan and the
Federal Reserve escalated the Fed funds rate from 1% to 1.25%. 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. The Fed's
rate-setting committee is scheduled to meet again Sept. 21, Nov. 10 and Dec. 14,
and they may skip a rate increase at one of those meetings if inflation is
subdued.
* 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. I highly
recommend ING savings for the highest rates around (www.ingdirect.com). They
also give great service, have no fees or hidden costs and are FDIC insured. You
can also name your accounts at ING to make it easy to identify what you?re
saving for.
* If you?ve been thinking about re-financing, there are still some
good deals out there and there?s no sense in procrastinating any longer. Contact
me for some excellent resources for re-financing.
* 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. If not, now?s
the time to start looking at other alternatives like cutting back, increasing
income or even refinancing.
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!
All in all, we?re 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.
