This week we had another increase in Federal interest rates, But This isn’t unusual. There are small, incremental increases every year. It’s easy to think this minuscule percentage Change won’t have much effect, but do you know how these regular, small increases can truly affect you?
If you're not familiar with federal interest rates, it's important you know that the government adjusts interest rates as a way to help control inflation. If it costs more to borrow money, people don’t buy as much and there is less of a rise in inflation. Of course, inflation has a tangible effect on our everyday lives so it makes sense that interest rate increases will as well.
Federal Increases And You
The first place you’ll notice these changes will be on your credit cards. You’ll immediately notice an increase in your interest rates as these are directly tied to the federal interest rates. It will only be a small increase, not a huge spike, but keep this in mind next time you swipe your card.
A place you may not expect to feel the effects of interest rate increases is through your mortgage. If you have an existing traditional mortgage then you don’t need to worry. If you have a 30-year or even a 10-year mortgage, you’re locked into your interest rate for that term.
New mortgages, will be affected the most. You can expect these rates to increase steadily, not just this year but over the upcoming years.
This shouldn’t be a surprise for you though and you can take advantage of it!
Making The Most Of Your Mortgage
Right now, mortgage rates are the lowest they’ll most likely ever be. In fact, rates haven’t been this low since the 1950s. On top of that, we’re in the 3rd most competitive housing market in measurable history. Homes will often go on the market one day and be gone the next.
It’s an excellent time to buy a house, but this fast-paced, low-cost market is causing people to make quick, unwise decisions as well.
Recently, I had a young couple came in. They told me they were interested in buying a home and their lender had suggested an Adjustable Rate Mortgage.
If you’re not familiar with ARMs, they’re essentially a mortgage option that locks the homeowner into a deceptively low-interest rate for 5 years and then adjusts the rate year by year, usually aggressively. There is a great benefit to ARMs as it lets homeowners purchase more home for their money and if they don’t plan on living there for longer than five years, they can move before the interest spikes.
This couple was attracted to the ARM because they wanted a bigger home and planned to have children in the next five years, so they thought this was a great option.
Here’s the problem: Life is unexpected.
People often assume that whatever goal they have will definitely come to fruition and they make big, potentially dangerous decisions based on these assumptions. You may plan to have children in the next five years and need a bigger house. You may also plan to still have a job in five years. You may plan on everyone in your family being happy and healthy in that time too. None of this is guaranteed, though.
But with an ARM, you make large and expensive decisions that could come back to bite you if everything doesn't pan out. Then you’re stuck in a long-term mortgage with an outrageous and unpredictable mortgage that can change from year to year based on the federal interest rate.
Interest Rates: Get 'Em While They're Low
Here is the advice I gave to this couple and, if you have children or grandchildren looking to buy a home this is advice you can give them as well: lock in the amazing interest rates available to you now.
Instead of an ARM, they could get a 30 year mortgage with the guaranteed lowest interest rate in our lifetime, purchase a more reasonable home and have the safety this mortgage term offers without making assumptions about their future. If they do end up having kids in five years and need a larger house, that’s great! They can reevaluate at that time. If everything doesn’t go as planned, they still have a low interest rate for as long as they need it.
When it comes down to it, the annual federal interest rate increases will affect your way of living, if not this year then in the upcoming years. There are ways, though, that you can take advantage of these changes to help yourself and your family out in the long-term.
If you’re unsure of how to make the best use of our current low interest rates or you’re afraid of the effect increases will have on your future, sign up for a free consultation. We’ll take a comprehensive look at your financial situation and ensure you make decisions that won’t hurt your long-term happiness.