Although interest rates have been very low for a while, they are now rising. To cool the high level of inflation we are experiencing, the Federal Reserve is raising interest rates for the first time since 2018.
During the uncertain economic times we are now living in, many are wondering how they can deal with higher interest rates in combination with the rapidly rising costs of the goods and services they need. The following are ways you can prepare your finances for interest rate hikes to make sure you avoid any unpleasant surprises.
Refinance Variable-Rate Loans to Fixed-Rate Loans
An important thing you can do to prepare your finances for interest rate hikes is to consider refinancing any loans you may have with variable interest rates to loans with fixed rates. This will protect you from future rate hikes.
If your current mortgage has a variable interest rate, for example, refinancing to a loan with a fixed rate could save you a lot of money when rate hikes occur. Although a one or two point increase in the interest rate may not sound like a lot, it could result in tens of thousands extra dollars that you will have to pay in interest over the life of your loan.
A home equity line of credit (HELOC) is another type of loan that has a variable interest rate. HELOCs are backed by the equity you have in your home. They let you draw money from a credit limit as often as you like until you hit the limit. Similar to credit cards, you can replenish your credit limit by repaying the money you borrowed.
Although HELOCs are convenient, their variable interest rates could be a problem if money is tight. Because there is no way to predict what interest rates will be in the future, refinancing into a loan with a fixed interest rate—like a home equity loan—will give you predictable monthly payments.
If you are thinking about refinancing a loan, it’s important to keep in mind that you may have to pay fees or closing costs to do so. Depending on the type of loan and the amount you are refinancing, these fees could be significant. Because of this, it’s important to research and understand the costs before deciding to refinance.
Consolidate High-Interest Debt
If you currently have one or more sources of high-interest debt—like credit cards, store cards, pawn shop loans, or payday loans—you may be able to consolidate that debt into one loan with a fixed interest rate. In addition to saving money on interest, you may also be able to pay the debt off quicker.
Some people with high credit card debt, for example, can only afford to make the minimum monthly payments. Thanks to the high interest rates, small payments may not make much of a dent in the balance owed.
By consolidating your high-interest debt into a single loan with a fixed interest rate, you will have predictable monthly payments until the balance is paid off. Even with interest rates rising, the new rate you lock in may still be lower than the rates you were previously paying.
Personal loans are very common with debt consolidation. These loans don’t require any collateral and the loan term will be fixed. You will know exactly how much you will owe each month, and you will also know the date of your last payment.
If you are a homeowner, a home equity loan is another option to consider for consolidating debt. These loans are similar to personal loans in how they are structured. The primary difference is that they use the equity you have in your home as collateral. Interest rates for home equity loans are usually lower than rates for personal loans.
Choose Fixed-Rate Mortgages
If you are thinking about buying a home, you may be tempted to go with a mortgage that has a variable rate to take advantage of the low introductory rate. Although these teaser rates may be enticing, the rate will eventually become variable, which could result in a substantial increase in the interest you will pay over the life of the loan.
Mortgages with fixed interest rates have several important benefits to consider when interest rates are rising. First, they allow you to lock in the current rate, which protects you from future rate increases.
Fixed-rate mortgages are also predictable. You will know exactly how much your monthly payments will be until the loan is repaid. This helps with budgeting, and it ensures that your housing costs won’t change.
Finally, fixed-rate mortgages make comparison shopping easy. When you know what lenders’ current rates are, you can easily compare them to see which one offers the best deal.
Make Big Purchases Now
Have you been thinking about replacing your kitchen appliances or buying some new furniture? Maybe you would like to buy that boat you’ve had your eye on. If it’s an expensive purchase that you need to finance, buying it before interest rates rise is a good idea. Locking in a good rate now can give you peace of mind when future rates are uncertain.
Now is also a good time to purchase a house or other real estate. The longer you wait to buy a house, the greater the chances that interest rates will rise. This could result in you being able to afford less house in the future than you could buy today.
Personal Loans with TEG Federal Credit Union
Whether you need to refinance an existing loan, consolidate high-interest debt, make a big purchase, or something else, a personal loan from TEGFCU is a great financing option. Qualifying for a personal loan is relatively easy, and there are usually few or no restrictions on how you can use the money you borrow.
Did you know, however, that TEGFCU offers five different kinds of personal loans?
Click below to learn more about TEGFCU’s personal loans and to find out which option is best for your needs.
