Interest Rate Increases in 2022
Federal reserve chairman Jerome Powell has already made good on his decision to raise the benchmark interest rate - three times. The first rate hike came in mid March 2022, with the second following soon after in April of 2022, the third hike came in May, and the fourth in June. There are another four projected rate hikes in the forecast for 2022 alone.
Why did the Fed raise the rate?
Higher interest rates encourage people to save money by increasing the interest rate paid on savings. They also make it more difficult to secure loans or take out credit, simply because they make borrowing money more expensive. Increasing the federal interest rate is one of the steps that the Fed is taking to slow or reverse inflation.
How does raising the rate affect our day-to-day?
In making borrowing money expensive, they are decreasing the general purchasing power of the consumer which, in turn, decreases the demand for goods and services. With a lower demand for goods and services, comes a decrease in cost across the board.
Here are some things that you can do now to take advantage of today’s lower interest rates before they go higher:
If you’re looking for a new home, now is still a good time to take out a mortgage. Although mortgage rates have risen as a result of the rate hike, with four more hikes scheduled this year, rates are likely to continue to rise even higher. Higher rates mean that you might likely end up paying thousands more on your mortgage loan over time.
Getting a lower rate while you still can is a good idea. Something you may want to consider is activating a “mortgage rate lock” which is offered by many top-tier lenders. A mortgage rate lock will guarantee your rate for a specific length of time (usually up to 60 days, but this varies by lender) while the loan itself is being processed and closed. With rates on the rise and the average home loan closing period being 30-45 days, this is a great feature to take advantage of right now. You might even be able to get an extension if the process takes longer. Locking your rate can save you thousands of dollars, and ensure that you get the best rate possible.
If you already own a home, you might also benefit from a home loan refinance, especially if you have a variable or adjustable rate mortgage. These types of loans are extremely sensitive to the increase in interest rates. Converting to a fixed rate mortgage loan can likely decrease the financial impact of further rate hikes.
Switching to a fixed rate loan might also be a good move if you have a HELOC (home equity line of credit). As with a mortgage, this will fix the rate of interest on your repayments against any credit you take out via your HELOC, so you’ll ultimately pay less on the money that you withdraw.
Refinancing might also help lower your monthly mortgage repayments, which can be extremely useful in times of rising inflation because it means having more cash on hand. You may also be able to shorten the term of your loan with a refinance. However, you should consider the fees you may have to pay to refinance, which could add a significant cost.
Although federal student loan payments and interest were paused as a result of the pandemic, those with private student loans have still had to pay. Refinancing your private student loan can be a good choice right now so you can take advantage of lower interest rates before they continue to rise. This is particularly important if your private student loan is not a fixed-rate loan and you don’t have a low interest rate locked in.
Student loan refinance companies pay off your existing debt and set up a new loan, which can have preferential terms, including a lower interest rate. This is especially true if you have a good credit score and stable income.
If you have a federal loan, refinancing may not be the best idea, as converting to a private loan can remove some of your consumer protections. There is also the possibility that federal student debt will be forgiven, which you’ll miss out on if you switch to a private loan.
Because rising interest rates can make it more difficult to get and pay off loans, now is a good time to take action in several key financial areas.
Taking out a new mortgage or refinancing your current mortgage to lock in low mortgage rates can save you significant amounts of money over the length of your loan. Refinancing private student loans is also a good idea. It's important to get lower rates now before they continue to rise over the next few months.
Although it’s important to do your research before committing to a new or refinanced loan, with interest rates on the rise, putting in some time and energy now can help you save thousands of dollars in the long run and make it more likely to get approved for the loan you need.