The prime interest rate is the rate the Federal Reserve charges financial institutions to borrow from it. It influences numerous financial prices, many of which only concern economic enthusiasts. Here are, however, some ways the prime rate hikes can affect you!
1.) Get Out of Your ARM
Many people opted for adjustable-rate mortgages (ARMs) when interest rates were historically low. These mortgages offer better rates for an introductory period before they adjust to a new rate, which is partially determined by the Federal Reserve rate.
The Federal Reserve plans to continuously increase interest rates as the economy improves. Consequently, your adjustable rate will likely increase, and your monthly mortgage payment may become unpredictable. Fortunately, you can still refinance your mortgage into a fixed-rate loan and take advantage of still-low rates.
2.) Balance Your Portfolio
The past six years’ low interest rates have done wonders for the stock market. With the affordable borrowing rates, companies expanded rapidly, directly fueling stock price growth.
As interest rates rise, that credit availability will decrease. Companies will find it harder to expand, their growth will slow and stock prices will decline.
Rising interest rates will also increase bond rates. Their price will rise accordingly, as more investors chase those rates. Speak to a financial adviser to ensure that your portfolio is properly balanced in accordance with changing market conditions.
3.) Save More
The rising interest rate affects the rates financial institutions offer account holders. When it’s expensive to borrow from other institutions, it’s more profitable for those institutions to “borrow” from their members through certificates and savings accounts. As interest rates rise, it’ll be increasingly more profitable to stow your money in an interest-bearing account.
If you’ve been delaying opening a certificate or increasing the deposits in your share account, consider it now. With a 12- or 23-month certificate, you can capitalize on rising interest rates.
4.) Refinance Your Debt
The service charges on several kinds of debt, like credit cards and private student loans, are tied to the prime rate and may increase along with it. That’s why you might want to consider refinancing now.
Avoid an increased debt rate by refinancing to a personal loan or a home equity line of credit, which bundles your high-interest debt with your low-interest mortgage. Speak with a debt counselor or other financial professional for other options – the sooner, the better.
The terminology surrounding financial news events is overwhelming. Community Financial can help you make sense of a changing economic landscape.