The past few weeks, my mortgage company has been sending me increasingly urgent e-mails, telling me that the feds are going to be raising rates shortly and I better hurry and refinance my loan! Side note – yeah, they want me to refinance my 2.75% mortgage into something higher. Oh, and take out tens of thousands in equity for college, home improvements, or to “pay off debt” (of which I have none except this mortgage). Uh, no thanks! On the 15th, it happened – the feds raised rates by a quarter of a percentage, and signaled two more rate increases are coming this year. But what does that mean to you and your wallet? And is my mortgage company generously concerned about my financial well-being? (Hint – No, they’re not).
For most people, this means exactly nothing in the short term. It will have an impact longer term on your loans, savings accounts, and bond funds. How? And why? Let me go through the details with you. Today I’ll cover the impacts to existing and new loans of all kinds, savings accounts, I Bonds and bonds/bond funds.
Existing Student Loans, Mortgages, and Car Loans
The key question to ask on loans is whether or not they’re at a fixed rate. If they are, the feds raising the fund rate has exactly zero impact on your finances. Your monthly payment will stay the same, and you’re locked into the interest rate you received when you took out the loan.
With mortgages, only about one percent of people take out an ARM (adjustable rate mortgage). Why so low? People know that these interest rates we’ve been seeing in the years since the Great Recession are the lowest they’ve been in history. When the interest rates are at an all time low, that’s the time to lock in your rate by using a fixed loan. Also people have seen others get bitten by rising rates before, and rates had no where to go but up. So an ARM only made logical sense if you were either planning to have it paid off or were going to sell your home before it adjusted.
Car loans? Those are typically fixed rate as well. In fact I’ve never heard of an adjustable rate car loan before, but apparently they do exist. So if you’re locked in to a low rate car loan, enjoy it while you get that depreciating asset paid off. Bonus points if you scored a zero percent loan!
Student loans? Again, if you locked in a fixed rate you’ll be fine. Your monthly payments won’t change at all. If you have a variable rate loan, you’ll see your payments go up eventually.
Let’s say you do have a variable rate loan – what should you expect to happen?
- Usually your interest rate is fixed for a period of time before it starts to adjust
- Once it starts adjusting, there’s usually restrictions on how often it can happen. It won’t adjust every time the feds change the rate
- For example, if you have a 5/1 ARM rates can only adjust after five years have passed, and then they adjust once per year
- You still have time to refinance into a fixed rate loan – and while rates are higher, they’re still pretty good from a historical perspective
- Given that two more rate hikes are coming within the year, now’s the time to get going on that refi
- Even if you can’t get a lower rate, it may be worth paying slightly more in the short term to have the guarantee of a low rate in the long term
- But, if you’re going to have the loan paid off either before it adjusts or shortly thereafter, it may not be worth the cost and hassle
Bottom line – for anyone with an existing fixed rate loan, the rising rates have no impact on you. For those with an adjustable rate, now’s the time to look at refinancing or set a goal to have it paid off soon.
Looking to refinance a student loan, personal loan, or mortgage? Use my referral link to SoFi and get $100 bonus when you refinance a student or personal loan. No payments on mortgages, but I’d still suggest popping over there to check out what they offer. I’ll get a payment for referring you, and you’ll get extra money – win/win! I haven’t used them before, but I’ve only heard good things about their loans, service, and support. They have a five star rating over on Credit Karma, Â and 3.9 with the Better Business Bureau.
Why am I not recommending a company I’ve done business with?
- I hate my mortgage company with the burning passion of a thousand suns, and would never recommend them to anyone
- I have no experience with personal loans
- The only student loan I had was through the government, and I paid off the balance before the monthly payments began
Want to check out the latest rates? Head on over to Magnify Money and compare rates on loans. You’ll also notice that SoFi is ranked highly over there.
New Student Loans, Mortgages, and Car Loans
OK, so you don’t have an existing loan – but you’re thinking about a new loan. You’ll be shopping around soon for a mortgage, or a car loan, or a student loan. So what does this hike mean to you?
It means borrowing is going to get more expensive, and higher payments, unfortunately. But not at the scary amounts you might think:
- New car loans will see their monthly payments rise by about $3 per month for every 0.25% increase in the fed funds rate. So if the fed hikes rates three times this year, the monthly payment will go up by $9 on a typical $25k car loan
- What about mortgages? I turned to my all-time favorite mortgage calculator for an answer. The average mortgage is $157k according to this article, so I’ll use that in my calculations. Before the rate hike, the 30 year mortgage rate was 4.21% and 15 year was 3.42%. Lets compare the “before” and “after” for a 0.25% rate hike (note – mortgage rates don’t rise/fall exactly in tandem with the fed funds rate, so this is for illustration purposes):
- Before: 30 year mortgage payment is $768.67, and the 15 year is $1,116.21
- After: 30 year mortgage payment is $791.77, and the 15 year is $1135.52
- Bottom line: The 30 year mortgage payment would go up by $23.10 per month, and the 15 year by $19.31. Hardly enough to break the bank
- New student loans may rise, but not as much as you might think. Private student loans most certainly will, but federal student loans make up 90% of outstanding loans. The federal loan rates are tied to the 10 year treasury rate, so again there’s not a direct rise from the fed funds rate
Bottom line: Although borrowing might get more expensive, it should still be affordable. Even if rates rise twice more this year, I’m sure you’ll still do better than the first mortgage I ever got, at an 8.375% interest rate (!!!).
Credit Cards and Home Equity Loans
These are usually adjustable rate, and will go up as the fed rate goes up, so now’s the time to get them paid off or refinance into a fixed rate loan. If you’re one of the people that pay off your credit cards every month, then the interest rate doesn’t matter. But if you carry a balance, pop on over to one of the rate comparison sites and look for a better deal.
Bottom line: Now’s the time to get that debt paid off, or refinance to a better rate. If you have credit cards, use that SoFi link and get $100 bonus for locking in a better rate on a personal loan (while I get a payment too). For home equity loans, look into refinancing that loan into a fixed rate mortgage.
Savings Accounts and CD’s
Finally, on to the fun stuff! With rates so low, savers have been punished with extremely low rates on their savings accounts. In fact, the average savings account rate is currently only 0.06%, which is horribly low. I can remember back in the day when I was getting over 5% – in a savings account!
Today I’m happy getting my 0.75% with Capital One 360. I’ve been with them since they were ING Direct, opening my account back in 2004 when internet banking was still new. In my 13 years with them they’ve consistently had one of the highest interest rates, and I’ve had nothing but good experiences. If you’re interested in opening an account with them, I’d love if you’d consider using my referral link, giving both me and you a small bonus. You’ll get $25 for opening a checking or savings account, which is more than the interest payment for a year with most banks!
I want to note that Capitol One not the highest rate available right now. Ally Bank, Synchrony, Goldman Sachs and Barclays are all offering 1% or more right now. All four companies get A ratings on Magnify Money. They won’t pay you (or me!) a bonus, and I can’t recommend them from personal experience, but I want my readers to have the best information and the best rates they can get.Â
At times, banks can be stingy about passing on the additional interest from the fed funds rate to you. So be sure to shop around for a better savings account deal, and check it out once per year to see if there’s a better deal for your money. Magnify Money has multiple savings accounts giving over 1% right now, even without the fed funds rate rise. As rates go up, you should be rewarded with higher interest on your emergency fund.
What about CD’s? Those have lingered with poor rates too. A quick look at historical CD rates shows that they’re currently hovering around a quarter of a percent. Again, you can get higher rates even now by shopping online and comparing deals. You can get a higher rate than a savings account, but at the cost of locking up your money.
Personally, I would not recommend locking in a low rate on a CD right now. With two more rate rises coming this year, you’re likely to get a better deal is you wait. While you’re waiting, be sure to keep your money in a savings account that pays more than that 0.06%! But if a CD is right for your financial situation, just make sure you get the best rate you can.
I Bonds
Ah, one of my favorite investments for keeping your money safe. In fact, right now the I Bond rate is higher than my mortgage rate. What are I Bonds? They’re inflation protected savings bonds, whose rates rise and fall with inflation. And why is the fed raising rates? To offset inflation risk. So I Bonds, which at times in the recent past haven’t been a good deal, are potentially about to become a lot more attractive.
There are five key downsides/restrictions to I Bonds that you should understand.
- Your money is locked up for 12 months before you can cash them
- If you cash them in before 5 years is up you will lose three months of interest
- There’s a limit to how many I Bonds you can buy in a year. It’s currently $10k per person online, with an additional $5k in paper bonds from your tax refund (side note – this is a good reason to get a tax refund!)
- The rates rise and fall with inflation. If inflation falls to zero, you get zero. The rates adjust every six months.
- A lot of people don’t like the website where you need to buy the bonds online, Treasury Direct. It can be a bit of a pain to navigate
I Bonds used to be sold with a significant fixed rate in addition to the variable inflation rate, but recently that fixed rate has been nothing or almost nothing. They can still be a valuable part of your overall portfolio. To learn more about I Bonds, head over here for an explanation or here to go to Treasury Direct and open an account.
Bonds and Bond Funds
Rising rates is the reason that people for years now have been railing against putting your money into bonds or bond funds. Of course, they’ve been saying it for years and it didn’t happen, but now it is. But why do rising rates impact bonds? It has to do with how they work.
Lets say during the low rate environment you bought $10,000 in bonds from a company, paying 3%, that will mature in 10 years. That 3% rate would have been pretty good at the time, especially compared with a savings account.
Now rates rise and new bonds are paying 6%. Your bond has 8 more years to go until you can get your $10,000 back. What if you need to sell it today? People aren’t going to want to pay you $10,000 for your bond. After all, they can just go out and get a new bond paying twice the interest rate. So you’ll be forced to sell your bond at a discount for less than $10,000. Exactly how much of a discount varies depending on (1) your interest rate compared with current rates and (2) how long until the bond matures. Interested in doing the math yourself? Find the formula and an explanation over here at Investopedia.
This process essentially works the same in bond funds. The longer term bond funds will fall more than the short term bond funds. Lower rate bonds will mature or be sold, and be eventually replaced with higher rate bonds, but the price of the funds may go down in the meantime. Bonds have had a bull market for many years, and financial experts see that coming to an end.
Does this mean that bonds have no place in your portfolio? That you should run out and sell them all, and go to gold? No. Remember to “Be greedy when others are fearful, and fearful when others are greedy” as Warren Buffet advises. When everyone is selling bonds and buying stocks, just hold steady to your investment policy statement. Don’t take on more risk than you’re comfortable with just because the talking heads are spouting gloom and doom. Remember, they always do that because it makes for good television/articles. Just “stay the course”, as Taylor Larimore of Bogleheads says.
What About You?
What impact, if any, do you see rising rates having on your financial life? Are you planning to lock in low fixed rates while you have the chance? Are you looking at your bond funds in fear? Let me know in the comments.
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I have also always laughed when banks try to sell loans to reduce debt. As if switching a debt from one category to a debt against your house stops it from being a debt. By the time you pay fees and costs associated with processing the loan, you will owe more money than before. Mortgage companies also oversell the deductible interest on home loans. I and many other people use the standard deduction on my taxes. As a result deductible interest makes absolutely no difference on my taxes.
I know, isn’t it crazy? In the week between when I wrote this article and today, I’ve gotten two more emails and a letter from my mortgage company, all begging me to refinance. I wonder who makes money from that-not me!
I’m excited for the rates to get back to normal so I can start earning more money in my Cap One 360 account & start a CD ladder again for my emergency fund.
The only debt we have is a 3.25% mortgage we just closed on in the fall & plan to have that paid off in 7 years. Unless we can’t find an affordable family vehicle in a few years on Craigslist & have to buy a new one, we don’t plan on borrowing money to make a large purchase again.
I’m also excited to finally get some real interest again. The only good rates lately have been in I bonds.
I see two things. One the most recent rate raise is peanuts, a quarter of a point. That will have zero impact. Maybe with four more gradual hikes it will get to a full point, then we might see something. I’m sitting on fixed debt and variable assets, which is what you want to be in an inflation environment, should it come. The fixed debt effectively acting as an inflation hedge. In so far as fed actions, I’m more worried about stability of message then rise or decrease. The market being unsure what happens next is never a good thing.
Yes it’s a lot better when they can consistently message their moves in advance, so the markets bake in the anticipated moves. I’d still love to see interest rates rise on savings accounts.
Hey Mom! As a person with ZERO DEBT, I’m not too worried about interest rate risk. I do have some bonds, and have been working toward shortening my maturity exposure. We also started buying IBonds last year, and will be buying our limit every year!
I’m much more worried about inflation than interest rates. That’s a big land mind, which everyone needs to keep an eye on….
So agree on the inflation risk. That’s why I love I bonds, especially my old ones with a fixed rate component!
My mortgage company has been urging me to take the equity out of home now while rates are still low. I chuckle as I shred, and I imagine the special place in hell for folks who try to trick other folks into bad financial positions by preying on ignorance and fear.
I just can’t believe how aggressive my company is about it-honestly, do I need two certified letters in a week urging me to take a 100% loan? No. I do feel sorry for anyone who falls for it, because they’re likely getting a worse rate in the end.
Nice summary of the effects of the Fed increasing interest rates. From the perspective of purchasing bond funds, I wouldn’t sweat that the Fed has signaled that they will increase interest rates twice in the coming year. This has already been baked into the current price of bonds.
People have been anticipating rising rates and falling bond funds for many years now. I can recall people back in 2012/2013 discussing how rates couldn’t stay this low and they’d go up any time. So I would hope all that information has been baked into bonds
Great read! I’ve been getting the same phone calls and letters from my bank. Well, to be precise: they are only the mortgage servicer and they earn a tiny fee for servicing the mortgage. The mortgage is probably bundled together into an MBS and owned by some large investors. Which explains the aggressive marketing: mortgage origination and the fees attached to that are the big money makers. Not the servicing.
All that makes the proposition of a refi even more insulting: They want me to refi into a higher (!) rate mortgage, for them to make more money. If I really needed more money out of the home equity I’d use a second mortgage or HELOC and keep the ultra-low-interest mortgage in place.
Cheers!
Yes mine is exactly the same! It’s a mortgage serviced who sends constant emails and letters begging me to refi at a worse rate and take equity out. Does your company also start with an “N”?
Yup. Nationstar Mortgage. But I’m sure many others are running the same kind of scams… 🙂
It’s good to know that I’m not the only one they bother! 😄
I’m not anticipating that interest rates will have any affect on me. I don’t carry any debt and if anything if interest rates rise maybe it will push homes prices down a little bit 🙂 If so the cash that I have may make for a good investment in a new property 🙂
Being debt free is the best place to be when rates are rising! 😀
We are in the home stretch for paying off our mortgage and that’s our last remaining debt. I don’t see us ever borrowing money again, at least for personal reasons (one exception may be investment real estate property if we ever go down that path).
We’ve also been with ING Direct, now Capital One, for a long time, so I’ll take a small bump in interest in our savings accounts. I still remember the good ol’ days of 5% on a CD – not sure they are going to be back anytime soon.
We have some exposure to bonds and the rising rates are likely to put some pressure on their overall returns. Thanks for the information on the I Bonds, I need to take a better look at them being the inflation worry-wart that I am.
Yes definitely check out the I bonds. They’re paying a high rate now, and they vary with inflation. So if there’s no inflation you don’t make interest, but if it skyrockets then you’re protected.
Awesome summary! Thanks for laying this all out so clearly. This is a great reference for people!
Thanks Chris!
We have a lot more flexible rate home loans in Australia, because our interest rates haven’t been quite as extreme as the US. The difference is, though, that rises in the rate are applied as soon as possible (usually within a week). Of course, when interest rates drop, it takes the banks up to 2 months to apply the new rate (it’s clearly so much more effort to press that “apply” button to a reduced rate). I love the idea of a 5/1 loan!
Of course it’s much easier to increase rates than decrease them when the bank will be making more money! But of course, on savings accounts it’s the opposite-when rates go up it’s much harder to increase them vs. cutting when rates go down. Funny how that works 🤔
” Even if rates rise twice more this year, I’m sure you’ll still do better than the first mortgage I ever got, at an 8.375% interest rate (!!!).” I was completely dumbfounded when my mom told me that they bought their house with a 16% interest rate. It’s like buying a house on a credit card! People are freaking out over minor tweaks to the interest rate here without seeing the big picture.
Thanks for the context that you provide. It definitely should help to calm people down seeing the real dollar values.
Personally I plan to change nothing. My only debt is locked in student loan debt. I don’t own a house or have a car loan or personal loan. I have a small emergency fund in savings and everything else gets invested. I’m just going to keep chugging along and start thinking about a new approach when we feel like we want to buy a house some number of years down the road.
Good idea-don’t let the interest rate tail wag the home purchase dog! My parents also got a high interest mortgage in the 80’s. It’s amazing how high they used to be. But CD rates were also high at that time.
This is a great post, thank you!
Personally I’d be happy with rates stabilizing between 3-4%, which would benefit savers and not punish responsible borrowers. I’ve benefitted from borrowing at 0%, but I don’t like the consequence of such low rates. It’s led to a lot of yield chasing and (arguably) some asset bubbles …
–R
I would love a return to 3 or 4% too. I also think higher rates on debt might discourage people from taking out more debt than they may need to just because rates are low. Yes, there might be some asset bubbles that need to be deflated, but keeping rates artificially low for so long has really harmed savers. There’s a generation of kids growing up now that don’t see a point in keeping money in the bank in a savings account because they only get a cent a month in interest. That’s not a good habit for kids to get into, it’s not going to serve them well in their adult years.
So true! I’ve been with ING / CapOne for a long time too and I remember getting 4-5% from a savings acct. I miss those days …
We managed to get lucky. We literally refinanced at the lowest rate possible. Literally 3 days later, a friend asked me for a referral to my insurance agent. The rate had already gone up (this was back in July 2016).
Nice-great job! We refied at the low in 2013, it was a nice feeling 😀
For me, i would love to go back to being able to get 5% at a savings account. Remember those days. So i’m ok with some rates getting raised. I can remember back in 1999 walking into a bank that was offering 6% CDs. imagine that!
I do remember those days! I used to get over 5% in my Vanguard money market before the crash. I miss those days!