With Goldman Sachs predicting that the Federal Reserve will raise its benchmark interest rate by a full percentage point this year, you might be worried that interest rate hikes will hurt your finances.
The federal funds rate, set by the central bank, is the overnight interest rate at which banks borrow from each other. It also influences the prime interest rate, which is what lenders use to determine how much interest you’ll pay on credit cards, mortgages, and other loans. When the federal funds rate rises, the prime rate tends to follow.
For now, you can make some money moves while the benchmark interest rate is still hovering around 0.08%. These won’t apply to everyone, but here are four to consider.
1. Refinance your home loans
You might find mortgages with around 3% interest for most of 2021, but the Mortgage Bankers Association predicts rates will rise to 4% this year, which could make monthly mortgage payments more expensive.
For a 30-year mortgage on a $300,000 home, the difference between 3% and 4% would be $147 more per month. Considering the average rate on a 30-year fixed-rate mortgage jumped to 3.68% this week, up 16 basis points from a week ago, you might want to commit to a lower rate now, before it goes even higher.
If you have an adjustable or variable rate mortgage that is already testing the limits of your monthly budget, you may want to refinance to lock in a fixed rate mortgage to ease the uncertainty of rising rates. But be sure to research the pros and cons of refinancing a mortgage before deciding.
Likewise, a home equity line of credit, or HELOC, is closely tied to the Fed’s benchmark rate, so you might want to shop around and switch from a variable rate to a fixed rate loan if you have one.
2. Refinance your private student loans
Although borrowers with private loans aren’t eligible for the Biden administration’s pause on federal student loan payments and interest, they have the option to refinance their loan at a fixed rate now, before interest rates drop. interest does increase.
If you have a private loan and are considering refinancing, you “should consider pulling the trigger as soon as possible to try and take advantage of current rates,” said Betsy Mayotte, president of the Institute of Student Loan Counselors, in a previous interview with CNBC.
3. Pay off your credit card debt
The average credit card interest rate is currently around 16%, but with rate hikes looming, those rates could drop back to around 17% by the end of the year, according to senior analyst Ted Rossman. of the industry at CreditCards.com.
While this only increases your monthly payments by a few dollars, depending on how much you owe, if you’re already struggling to pay your bills, those extra few dollars could be an unexpected burden.
In that case, now might be the time to look at all of your debt consolidation options, including a balance transfer card or taking out a personal loan, and see what works best for you.
If you have federal student loan payments that have been suspended until May, you can use those funds to do some financial housekeeping, like paying off some of your credit card debt to help ease rising student fees. interest, if you can afford it.
4. Improve your credit score
Since lenders use your credit score to determine the interest rates you’ll pay on loans, the easiest way to offset benchmark interest rate increases is to improve your credit score.
Credit cards are a good example of how this works, especially since banks can raise your rates at any time as long as they give you 45 days notice.
Let’s say you owe a balance of $6,194, the national average. With a good credit score of 660 to 719, you’d pay $1,983 in interest alone if you made monthly payments of $200, according to CNBC Select. That’s nearly $700 less than what you’d pay in interest with a subprime credit score of 580 to 619.
To keep your credit score high, focus on paying off your debts and making timely payments of your outstanding balance each month. You can find more tips on improving your credit score here.
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