Interest rates may be near historic lows, but most financial advisers agree they can’t stay low forever. As the Federal Reserve weighs the timing of an increase in interest rates, smart consumers can get their financial house in order before those low rates are history.
“The general consensus is that rates will rise. Nobody expects it to be a dramatic shift, but the clock is ticking on today’s low rates,” says Craig Martin, director in the mortgage practice for J.D. Power and Associates, based in Westlake Village, California.
CHECK OUT MORTGAGES
Financial advisers agree that if you are on the fence about buying or refinancing, now is the time to act.
“If somebody had a mortgage, that would be one of the first things I’d talk about,” says Tony D’Amico, CEO of financial advisory firm The Fidato Group.
However, Martin warns that just because rates are low doesn’t mean you should jump into a mortgage without thinking everything through.
He says the loan product that makes the most sense depends largely on the situation of the borrower.
“If you are in your mid-20s and you think you will be stable for around 5 years, you might look at an adjustable-rate product that will lock in for a short time period,” Martin says.
But if you plan to be somewhere for the rest of your life, a fixed-rate mortgage makes more sense.
Experts recommend: If you are in the market to buy a house or to refinance your mortgage, act sooner rather than later.
WATCH FOR RISING HELOC RATES
Home equity lines of credit have variable rates that are linked to the prime rate. That means HELOC rates rise when the Fed hikes the federal funds rate.
In contrast, rates on fixed-rate home equity loans don’t respond directly to the Fed. They are set by the market forces of supply and demand.
Fewer lenders offer home equity loans compared with a few years ago. Instead, banks have been pushing hybrid HELOC products that let borrowers set aside a portion of the credit line for a fixed term and lock a fixed rate on it.
REFINANCE CREDIT CARDS BEFORE RATE HIKE
Credit cards are another instrument tightly tied to the federal funds rate. So, if you are carrying a balance on a card, it might make sense to roll that balance into a low-interest card or home equity loan.
Experts recommend: Take advantage of historically low interest rates to refinance high-interest cards, but do this only after you fix your budget overruns.
GRADUAL RISE IN DEPOSIT-ACCOUNT EARNINGS
Savings accounts, certificates of deposit and money market accounts move nearly in lock step with the federal funds rate. As the Fed pushed down rates, your savings account was one of the first places you felt that dip; vice versa when they rise.
Since the Fed is likely to raise rates gradually, the increases in deposit account rates likely will be gradual also.
D’Amico says he still strongly suggests you keep six months’ worth of expenses stashed away in an emergency fund.
Experts recommend: Keep your emergency fund in an FDIC-insured account, but don’t expect it to earn much interest, even if the Fed raises rates.
CONSIDER A CAR LOAN BEFORE RATES JUMP
Although it isn’t a direct relationship, a low federal funds rate does help keep interest for auto loans low.
“Auto finance rates are influenced by the federal funds rate but do not necessarily match it,” says Susan Fitzpatrick, a spokeswoman for lender Ally Financial.
Fitzpatrick says the interest rates for auto loans also depend on factors such as your credit score, the price of the car and the overall terms of the auto sale.
Rather than shopping for cars based on interest rates, Fitzpatrick recommends you take into account an accurate picture of what you can pay each month.
Experts recommend: Finance that auto purchase now, before rates go up, but only if buying a vehicle fits into your larger financial picture. Also weigh factors such as down payment and maintaining a good credit score to keep your loan amount lower.
STUDENT LOANS ARE NOT AFFECTED BY THE FED
The market does not set student loan interest rates — the U.S. Congress does. Student loans currently cannot be refinanced to reduce their interest rates.
You may be able to pay them off by taking out another loan, such as a home equity loan or a personal loan that may have a lower interest rate.
But take into account the tax benefits of student loans, and in some cases these loans can be canceled, forgiven or discharged.
So, it’s a complex decision of what to do while interest rates are still low. It is especially tough for parents who might have taken out a loan on behalf of their children, D’Amico says.
Experts recommend: Take out student loans wisely if they will pave the way for future opportunities. But talk to an adviser before rolling them into another loan product.
STOCK AND BOND MARKETS COULD TAKE A HIT
With interest rates near zero, you may feel the temptation to borrow money to play the stock market.
Don’t, says Ken Weber, president of Weber Asset Management in Lake Success, New York.
The stock market had gone up for about 6 years. With its recent gyrations, the market is hard to predict.
Even with historically low interest rates, it is too risky to borrow and invest with that money, Weber says. Once rates do begin to rise, it is difficult to say what will happen to markets.
“The conventional wisdom is that both stock and bond markets will take a hit, but it is also true that stocks can climb the wall of worry, so any hit may be short-lived,” Weber says.
Experts recommend: Invest cautiously in the stock market, but don’t borrow money to invest.
ABOUT THE WRITER
Michael Giusti writes for Bankrate.com. Visit Bankrate online at http://www.bankrate.com.