Interest rates are rising, but what does that mean to you? Financial service providers have begun to offer financial alternatives that may offer consumers lower rates in this time of financial turbulence. Here are some tips for navigating your finances during turbulent times.
Take stock of your finances.
The first step to navigating through financial turbulence is to understand your current situation. Knowing the amount of your debt as well as your savings will help protect you when rates start to fluctuate and will guide you to making smart financial decisions in a rising-rate environment. Starting with a financial action plan is the key to navigating a volatile market.
Pay down your debt.
Whether your debt stems from loans or credit cards, streamlining your payments is an important first step to financial security and to warding off financial turbulence. Debt consolidation and personal loans may offer some alternatives to making monthly high-interest payments. Your goal should be to eliminate your highest interest debt first. The minimum payments to high interest debt, like credit cards, goes almost entirely to that: the interest. And in those cases, the principal balance is reduced much slower, prolonging the debt and allowing that interest to compound over time. Removing those high interest debts frees up more money that can be put toward lower interest debt principals, like cars or mortgages, to pay those off faster as well. This is often referred to as the “debt snowball” method, referencing the momentum you gain in paying off the high interest first and therefore being able to pay off the rest even faster!
Understand your loan structure.
Review your current loans to determine if they are fixed rate or variable rate. Variable rate loans will fluctuate with current market rates, most likely resulting in a higher monthly payment. Variable rate loans typically have a fixed interest rate in the beginning and then adjust annually or every six months. The initial rate is typically below that of a comparable fixed-rate mortgage.
Today, most variable rate loans have fixed periods of five, seven, or even 10 years, during which the interest rate won’t change even if market rates go up, providing stability for homeowners during this time.
Refinancing to lock in a lower fixed rate is another option.
Consider alternative financing alternatives.
Some financial service providers have begun offering financing alternatives to offset the fluctuating market. Consumers looking into these alternatives should remember the potential consequences today and in the future.
- Temporary Buydowns—The mortgage payment is lowered for the first couple of years in exchange for a higher interest rate later, which could be higher than a fixed-rate mortgage. Consumers considering a temporary buydown should compare the costs for loans with and without the temporary reduced rate.
- Home Equity Line of Credit (HELOC)– HELOCs usually come with an adjustable interest rate and allow borrowers to use the funds when needed on a line of credit for a specific time. After that, the HELOC enters the repayment phase where the homeowner cannot borrow additional funds and must make minimum payments to pay off the debt. Home equity loans are usually fixed-rate loans for a set amount that is repaid over a specific term.
- Loan assumption—Allows the homebuyer to take over the remaining balance of the home seller’s mortgage with the original loan terms. This would allow a purchaser to take over a fixed rate mortgage with a rate far below the current market. The purchaser then needs to make up any difference between the sales price and the outstanding balance of the assumed loan. Finding a lender willing to make a second mortgage for the difference may be challenging, particularly given existing limitations in lending programs.
Don’t stop saving.
Emergencies happen whether interest rates are stable or unstable. So don’t be caught unprepared because of a fear of market fluctuations. Reducing the amount you save may force you to rely on high-interest credit cards to pay for unplanned expenses. Keep your savings at a healthy amount based on your normal expenses. The experts at First Keystone Community Bank recommend keeping the equivalent of six months of expenses for emergencies despite the current economic climate.
Manage your investments.
Once your emergency savings account is secure, the decision to invest any additional funds will depend on your individual situation. Two factors should lead the discussion of where and how to invest: the volatility of the market and your personal timeframe.
If the market is susceptible to fluctuation, then a variable investment such as a variable-rate money market may not be the best option. A fixed-rate CD may be the smarter decision because it may be more secure in a turbulent market and may be more likely to pay a higher interest rate. The second factor to consider is your personal timeframe. Products with higher interest rates typically require a longer timeframe for funds to be unavailable, while a lower-interest savings account may not have the same restrictions.
Turbulent times provide an open door to scammers.
While you should always be diligent about personal financial security, turbulent financial times can be ideal situations for scammers to prey on nervous consumers. Follow the advice of a reputable financial adviser on how to stay safe and be proactive against scams.
For more information on financial safety and security, contact the experts at First Keystone Community Bank, 570-752-3671.