For most of the past 20 years, interest rates have steadily fallen, but soaring inflation doesn’t just make almost everything we buy more expensive. The cost of borrowing money is also likely to be higher. In March, the Federal Reserve raised rates by 0.25%. The main tool in his financial box is to raise interest rates. The Fed has indicated that it will likely raise rates again at each of its six remaining meetings scheduled for 2022 and most likely through 2023.
So what does this mean for consumers as interest rates start to rise? There are four ways that rising interest rates will affect our portfolios almost immediately.
The cost of home equity margins will start to rise
As the value of our homes has increased dramatically over the past few years, the use of home equity loans has also increased. Borrowing money inexpensively has allowed many people to pay for home renovations, consolidate debt, educate their children, or simply have an extra source of money when needed. Many consumers are unaware that the interest they pay on the equity in their property is not a fixed interest rate. The rate can change at any time and will likely start rising immediately when the Fed raises interest rates. This will result in an increase in interest-only payments on home equity loans.
Car and house purchases will become more expensive
One of the side effects of the COVID-19 pandemic is that the normal distribution chain of supplies needed to build homes and manufacture automobiles has been severely disrupted. The result has been a shortage of new vehicles in our local parking lots and a severe shortage of available homes in our market.
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This shortage has caused an unprecedented price increase, but it is about to get worse. The cost of borrowing money to buy the few available cars and homes will start to rise due to upcoming interest rate hikes. This increase in the cost of borrowing will increase monthly payments to a level that could prevent many people from buying the car they need or the house of their dreams.
Debt repayment will become increasingly difficult
One of the benefits of the low interest rates we have experienced in recent years is that many people have been able to get out of debt because more of their monthly debt payments went to their loan principal and less was paid in interests. to the lending institution. This should change drastically over the next few months as credit card companies begin raising interest rates in response to Fed rate hikes. So more of your monthly payment will just be used to pay the interest owed on the debt. The net result is that it will become increasingly difficult to get out of debt.
Fixed rate savings will begin to rise
With inflation compressing our monthly budgets, interest rates on our debt rising and causing more financial hardship, and the stock market in turmoil, good financial news seems hard to come by these days. However, there is good news that will come from the Fed’s interest rate hike.
As the Fed cut rates to near zero, available interest rates at banks and yields on short-term bonds fell to virtually nothing. This has created real hardship for retirees and others who rely on safe money incomes to subsidize Social Security and retirement pensions. So those who have been able to save money in fixed-rate investments are about to get interest relief. They will see the returns on their certificates of deposit, high-yield savings accounts, checking accounts and short-term bond portfolios increase. This is good news for those who are retired and struggling to make ends meet due to the rising cost of everyday goods and services due to inflation.
So what should we as consumers do in the face of rising interest rates? The most important thing is to realize that the sky is not falling. We may struggle in the short term, but our economy has proven time and time again that it is resilient because of the strength of the American people.
We’ve endured the dot-com bubble burst of 2000, the financial crisis of 2008, several recessions, and a host of less dramatic financial struggles since the turn of the century. Not only have we endured, but we have thrived after every challenge we faced. The financial challenges we face as a result of the COVID-19 pandemic, such as inflation and rising interest rates, are no different. Not only will we survive these difficult financial times, but we will emerge stronger in the end. Let’s make the best possible financial decisions for ourselves and our families, take things day by day, and be grateful for the many blessings we have.
Brian Stivers is the president and founder of Stivers Financial Services in Knoxville.