What To Do Before Interest Rates Start Rising?
Federal Reserve Chairman Jerome Powell took note of a possible increase in interest rates to curb inflation, which can start as early as March of this year.
People are more encouraged to save money if there is a higher interest rate because their savings accounts get higher interest. However, higher interest rates can also make loans and credits more difficult to access. With less demand for goods and services and less money on the market, inflation is slowed down.
Once the federal rates increase, borrowers will have to face higher payments when they get a loan. It can also make it harder for you to get a loan approved. As loans get more expensive, lenders become more apprehensive about receiving the repayment in full. What should you do to take advantage of low rates?
1. Apply for personal loans and debt consolidation loans.
If you’ve been planning to get a loan to fund a major expense, now is the best time to apply for one and take advantage of the lower rates. However, the type of loan you’re applying for is also important to consider. Auto loans, for instance, are not heavily affected by higher rates because these typically have lower amounts and shorter terms than other types of loans. If you are looking for a debt consolidation loan, getting a loan with low rates can help you save money in the long term.
If you are dealing with credit card debts, getting a loan to pay for them is also an option before the higher interest rates become more burdensome. Debt consolidation loans merge all your loans and debts into one payment. You just need to make a single monthly payment. This makes payments more manageable and can also get you better rates to help save money.
Debt consolidation loans can also help simplify finances. However, you should do proper research before you sign anything. If you do not have a good credit score, you might not receive offers with better rates. Missing a payment leads to late payment fees and can also drop your credit score.
2. Refinance Student Loans
Payments and interest on federal student loans were put on hold due to the pandemic but those who took out private student loans continued paying. While the interest rates are still lower, it’s a good option to refinance private student loans. This is especially true if your private student loan does not have a fixed rate because the low interest rate is not locked in.
Refinancing companies for student loans pay the existing debt and set up a new loan for you. These can have preferential terms such as lower interest rates. If you have a federal student loan, refinancing may not be your best course of action. Converting your federal student loan to a private loan can make you ineligible for some consumer protections. You might also miss out on the possibility of debt forgiveness for federal loans if you move to a private loan.
3. Mortgage Rate Lock
Those looking for a new home can also take advantage of the relatively lower rates by getting a new mortgage. Mortgage rates have already increased as mortgage lenders wait for the Fed’s move but the increase is expected throughout the year. Higher rates can make it more difficult to qualify for a mortgage loan. It can also lead you to pay thousands of dollars more in the long run.
Getting a mortgage with a lower rate is a good move for those looking for a home. You should also consider locking in your mortgage rate. This guarantees your quoted rate for 15 to 60 days while your loan is closed. You can also get an extension if the process is delayed. Locking your mortgage rate can help save thousands of dollars over the full length of your loan by giving you the best possible rate.
If you’re already paying for a mortgage, you might want to consider refinancing. This is beneficial if you have an adjustable or variable rate mortgage that can be affected by the increase in interest rates. A lot of people missed out on the low rates during the pandemic. Switching to a fixed-rate mortgage loan can help reduce the financial impacts of the pending increase in interest rates. Converting to a fixed rate is also advantageous if you have a HELOC or home equity line of credit. The rate of interest on repayments against credit taken out via HELOC is fixed so you get to pay less.
Refinancing your mortgage can also reduce your monthly repayments. This becomes especially beneficial with the rising inflation since you’ll have more spare cash. However, with refinancing comes certain fees which you also need to consider.
Bottom line
Increasing interest rates can provide borrowers with more challenges in repaying their loans. Now is actually a good time to take steps in key financial aspects. Refinancing your mortgage loan or taking out a new one to activate the mortgage rate lock can help save a lot of money over the term of the loan. It’s also a good step to refinance private student loans. If you’re paying off several loans or debts, debt consolidation loans are a good option to explore.
It’s essential to do the research before you commit or sign a new loan. Putting in the effort now can help you save a lot more in the future and have a higher chance of getting a new loan approved.
