Janet Yellen, arguably the most powerful person in the world, has continued to let the world know that the Fed is on track to raise the Federal Funds rate (the rate banks pay on overnight loans) in 2015. Since this rate has not increased for almost 9 years, you might wonder, is this good or bad for me? It’s probably both, but knowing more concisely how this will affect you might help you prepare now and minimize the negative and accentuate the positive.
Savings and CD rates have been almost unnoticeable for almost a decade now. If you have some funds invested in bonds or savings you might be hopeful to actually get some kind of perceptible return on your money. Short term bonds, those 3 – 5 years should see higher yields fairly quickly, but longer term treasuries probably won’t be affected as much. Banks typically increase rates on savings and CD’s when they need to attract depositors. Few banks need to do that now, says Ted Peters, a veteran banker and former board member of the Federal Reserve Bank of Philadelphia. “There is a tremendous amount of liquidity in the market, so banks aren’t really hungry for deposits,” Money Market accounts are also slow to react to rising rates because they work on 60 day portfolio maturities or shorter and it can take a few months to see increases here. Banks are not anxious to raise their payouts so they can realize greater returns on their own funds.
30 year fixed loan rates are based on the 10 year treasury yield and most economists believe these yields will stay relatively the same leaving 30 year fixed rates stable. On the other hand, adjustable rate mortgages could rise fairly quickly because they are tied to short term interest rates such as the LIBOR which will be greatly affected by the federal funds rate rising. Most arms have yearly caps on increases of about 2% or so, which could cause your payment to increase substantially. Another product greatly affected by short term rates is your credit card. Currently it is fairly easy to get 0% introductory rate offers and 18% or so after that. Those 0% offers might disappear and that 18% rate could rise to much higher.
Now would be the time to get ready, perhaps paying down debt and credit card balances, or changing from a variable HELOC to a fixed rate loan. A reverse mortgage might be just the right tool to help you prepare, many of our clients have been able to pull out significant funds from their home, while at the same time eliminating their monthly mortgage payments. It would be wise to use these funds to pay off your debt with the highest interest rates first. To see what how much you may qualify, you can check our reverse mortgage calculator here.