No one knows exactly when the Federal Reserve will raise interest rates, but one thing’s for sure: the historically low rates that have dominated the U.S. economy since the financial crisis are coming to an end.
Unless there is an unexpected catastrophe or crisis, the Fed will be raising short-term rates later this year or early next year from the zero to 0.25% range that has prevailed since December 2008. The move will lift long-term rates, though not necessarily right away, which means that rates on mortgages, home equity loans, car loans and any other household debt will eventually rise as well. On the flip side, the income that investors earn from bills, notes, bonds and CDs will also rise.
Rising interest rates are the No. 1 concern among financial advisors, according to a fourth-quarter Fidelity survey of advisors. So what are they suggesting consumers do now before rates begin to rise?
“Take advantage of the current low rates for any near-term borrowing that you can foresee, such as auto purchases, business loans and refinancing mortgages,” says Jim Blankenship, founder and principal of Blankenship Financial Planning.
“Car loans are one of the easiest debts to refinance if you have a good credit score,” says Katie Brewer, president of Your Richest Life, a financial advisor in Garland, Texas.
But the biggest savings for consumers will most likely come from refinancing their home mortgages. “Fixed mortgage rates now are lower than at any point in 2014, and there’s no guarantee they’ll stay this low once the Fed starts to boost short-term rates,” says Greg McBride, chief financial analyst at Bankrate.com.
Brewer favors refinancing for homeowners whose mortgage rate now is at least a percentage or more above current rates.
The current 30-year fixed mortgage rate is 3.8%, just a half percent above the record low of 3.35% in 2013 and below the 4.17% average in 2014, according to Freddie Mac data.
Homeowners are taking advantage of these low rates. Refinancing applications are up about 35% from a year ago, and they accounted for 60% of all mortgage applications for the week ended March 27, according to the latest data from the Mortgage Bankers Association.
Refinancing will help homeowners better manage their finances, but it could also cost them if they extend the term of their loan at the same time. “If you had a 30-year mortgage and you’ve been paying on it for 10 years, you should look at a 10-year, 15-year or 20-year loan to refinance into,” says Brewer.
And they should consider the refinancing costs. “There are pretty hefty expenses associated with refinancing,” she says, “so make sure you know when you will break even with the refinancing costs.”
Another way consumers can take advantage of low rates now is to reduce their variable-rate debt, such as high-interest credit card debt. “Grab those zero percent credit card balance transfer introductory offers now,” says McBride. “As the Fed moves away from zero percent rates, credit card issuers will likely do the same. Chip away at your variable rate debt now before rates start to rise.”
One of the most common variable debt products is a home equity line of credit. A typical HELOC has a term of about 25 years, but borrowers pay only interest for the first 10 years or so. Once that “draw” period ends, both interest and some principal must be paid, so HELOC borrowers who are facing the end of their draw period “have a double incentive” to reduce their home equity debt, says McBride.
Savers, too, can take advantage of the current low-rate environment. ”I recommend that any CD renewal be very short-term (1 year or less) so that when rates increase the CD can be renewed again at the higher rates relatively soon,” says Blankenship.
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