Whether it’s at the gas pump or in the grocery store, many Americans are experiencing the impacts of rapidly rising inflation. However, many Americans may be having a harder time understanding the connection between rising interest rates and the impact on their pocketbook, or even why interest rates are rising in the first place.
Simply put, one way the Federal Reserve (“the Fed”) combats rising inflation is by raising interest rates to slow economic activity. This is the opposite approach to lowering interest rates to spur economic activity. When interest rates are low, lending and spending activity is often higher. When interest rates are high, lending and spending activity typically decreases. The hope is that this reduced economic activity will be enough to slow inflation. Here’s how rising interest rates may impact each aspect of your personal finances.
Rising mortgage rates
The most popular mortgage loan is a fixed rate mortgage, which does not change when rates change. If you are a current homeowner with a fixed rate mortgage, you likely won’t feel an impact on your mortgage. However, if you have an adjustable-rate mortgage, your interest rate will rise and you will likely see an increase in your monthly payment.
If you are currently in the market to buy a home, you may secure a loan with a higher rate compared to buying around this same time last year, when rates were at an all-time low. Our financial calculators are a helpful tool to plan ahead and gauge how your monthly mortgage payment could look if you fall into this category.
Rising loan interest rates
If you think you may need a personal loan soon, be aware that the longer you wait, the higher interest rates may rise and you will pay more in interest to repay your loan. Another area you may experience an impact is any line of credit you have open, such as a credit card. Credit cards commonly come with a variable rate, which means your monthly payment will increase as rates rise.
Rising deposit rates
When interest rates rise, rates on things like savings accounts and certificates of deposit (CD) often increase as well. This means the money you have in savings may start earning more interest than when interest rates are low. If you have a sum of money you don’t foresee needing for a period of time, consider investing in a CD, as they commonly earn more interest than savings accounts.
Other ways you can prepare for rising rates
If you aren’t sure if you have a fixed or adjustable-rate mortgage, check with your mortgage lender to find out. This will help you determine the impact of rising rates on this part of your budget. Consider also taking a look at your other personal loans to see what the rates are and if they could potentially increase. Lastly, if you don’t already have a budget, considering starting one. This may seem like a small or insignificant change, but it is the key to staying on track during changing environmental factors.