After years of post-recession recovery and caution by the Federal Reserve (Fed), interest rates have finally inched up. While the recent quarter-percent hike in short-term interest rates is not going to have an immediate effect on much, it’s a signal that higher interest rates are likely in the near future. The Pennsylvania Institute of Certified Public Accountants offers these interest rate considerations that may affect your financial future.
If you have a mortgage interest rate that’s a couple of points higher than the historical lows we have recently enjoyed, or if you’ve been contemplating a refinance to either restructure your debt or obtain funds for home improvement, act now. As the Fed raises rates, mortgages will become more expensive. And as people stop procrastinating and act on obtaining mortgages, it’s going to be tougher to get the mortgage you want and it may take longer. So if a new mortgage is on your to do list, get it now.
Related to mortgage rates, the market for home sales will likely be affected by interest rate rises. With mortgages as cheap as they have been the last few years, home prices have had a decent chance to rebound from the recession. As mortgages get more expensive, it will be harder to sell houses because it will become more expensive for buyers. If you have been considering a home sale, now might be the time to act, especially if a speedy sale is important to you. If rates rise quickly enough, it may mean that home prices stall. The real estate market frequently reacts in unexpected ways, but it’s a fact that if mortgages cost more, the pool of qualified buyers for homes is going to shrink.
Risk and Investment Profile
It’s too early to do much tinkering with your investment portfolio based on such a tiny rise in rates, but if you haven’t recently rebalanced or evaluated your risk and investment profile, do that now also. As interest rates rise, interest-bearing investments will become more attractive. If you’ve been uneasy about how much risk you have been bearing in the market, but have believed you had no other options because of the practically nonexistent returns on low-risk interest-bearing instruments, you may see an opportunity to change your asset allocations as interest rates rise. This is especially important as you approach retirement and will need to use your savings.
Credit Card Rates
Carrying excess credit card debt is never a good idea, but it’s been as cheap as it could be the last few years. That will soon change. Credit card rates will be the first thing to jump as the Fed raises rates. Pay off your credit card debt now. If you can’t retire it all at once, put yourself on as aggressive payment plan as you can to get rid of it before credit card interest rates skyrocket.
If you serve on a board of directors or have stewardship over funds of an association, it’s important to reexamine the goals and investment profiles of those organizations as well. Just as your personal financial plans need a periodic tune-up, the financial profile of organizations with invested assets also needs stewardship. If it’s part of your role to provide that stewardship, neglect it at your peril.
Interest rates will be in the news in 2016. Be sure you are not left behind as the landscape shifts over the coming months. Your local CPA can help you get a better handle on these upcoming changes. Visit www.picpa.org/moneyandlife
for resources including the free PICPA CPA locator tool