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Financial Tip

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

How Rising Interest Rates Could Impact Your Finances in 2017

How Rising Interest Rates Could Impact Your Finances in 2017

As expected, the Federal Reserve hiked its short-term interest rate by one quarter of point at its December 2016 meeting. It was the first increase since the prior December and only the second in more than a decade. Because the economy appears to be picking up some steam, the Fed has indicated that there may be more rate increases in 2017. Small incremental increases in the short-term rate don’t necessarily have a direct impact on consumers. However, long-term rates have also been increasing due to a stronger economy and the prospect of higher inflation. Those are the rates tied to mortgages, loans and savings accounts that do affect your pocketbook.

What is Making Interest Rates Rise?

Near the end of 2016, the economy finally exhibited some long-awaited signs of strength. Before the election, long-term bond yields began to rise for the first time in awhile. Because mortgage rates are directly linked to long-term bond rates, they also jumped. Since the election the stock market has soared to record highs, which has driven bond yields even higher. The stock and bond markets are reacting to the optimism for a growing economy and the prospect of higher inflation that tends to accompany it. If the current trend continues, consumers can expect higher interest rates to impact their personal finances in the coming years.

Mortgage Rates

Mortgage rates, which had been hovering near historic lows, began to rise just before the election. The rate on a 30-year fixed loan jumped more than a half a point, from 3.4% to just over 4%. Because mortgage rates are more directly linked to the yields on Treasury bonds, they will continue to rise if Treasury bond yields continue to rise.

If you are planning on refinancing a fixed mortgage, now would be the time to do so. If you have an adjustable rate loan, you can expect your interest costs to increase. Now would be the time to lock in a current rate.

Consumer Debt

If you hold any type of debt with a variable rate, you can expect to see your interest costs creep up. Most consumer loans with variable rates adjust once a year, while credit cards with variable APRs can adjust at any time. Now would be the time to pay down your higher interest credit card debt or look for opportunities to transfer your balance to a zero interest credit card for twelve months or longer and pay down the debt more quickly.

Deposit Accounts

The good news is that savers will finally see an increase in their savings rate. The bad news is savings rates aren’t expected to rise very quickly or very far, at least for a while. You can expect your savings account rate to lag behind general interest rate increases for a while. The rates on money market accounts and CDs with longer maturities may rise a little faster than savings accounts.

Investments

When the yields on bonds increase, their value decreases. However, bonds held to maturity are still redeemed for full value. If you plan on selling a bond in this environment, you will probably receive less than what you paid for it. If you own a bond mutual fund, you are likely to see a decrease in share value, but, as the fund manager buys newer, higher yielding bonds, you should also see an increase in the fund’s yield.

Stocks and stock funds can be a little trickier. Generally, higher interest rates and inflation can have a dampening effect on some stocks. Higher interest rates increase the cost of borrowing for companies which can limit their growth. Higher inflation can also increase costs for companies. However, during a period of economic expansion, which is driven by higher corporate earnings, stocks should perform well. It is when the economy starts to overheat that higher interest rates and inflation can spike, causing stock prices to fall.

Regardless of the interest rate environment, the key to sound, long-term investing is to make sure your portfolio is well-diversified with a range of different assets. Stocks tend to perform well when bonds aren’t and vice versa, so it is recommended that your portfolio be balanced with a mix of both.


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