Posted by BEST FINANCIAL GROUP LTD

What Changes To Interest Rates Can You Expect?

What Changes To Interest Rates Can You Expect?

In the year 2019, interest rates will continue to rise. But rates for mortgages, savings accounts, credit cards, and certificates of deposit rise at different speeds since each product relies on different benchmarks. How their interest rates are determined is where the increase depends on. 

The fed funds rates are what all short-term interest rates follow. For overnight loans of fed funds, that is what banks charge each other. During the meeting, last December 19, 2018, The Federal Open Market Committee raised the fed funds by a quarter. Positive job reports, steady economic growth, and a healthy inflation rate are what encouraged the Committee.

When will the Interest Rates rise?

2.5 percent is what the current fed fund rate is and the Fed expects to keep it that way through 2021. After the recession was safely over in December 2015, the committee began raising rates. 

The 10-year Treasury yield is what long-term rates follow. It was 2.03 percent as of June 19, 2019. Normally, the demand for Treasury falls if the economy improves. As sellers try to make the bonds more attractive, the yields rise. Interest rates on long-term loans, mortgages, and bonds are what Higher Treasury yields drive up. To protect yourself from higher interest rates, below are the five steps you can take.

CDs and Savings Account

The London Interbank Offer Rate is what interest rates for savings account and certificates of deposit track. For short-term loans, that’s the interest rate banks charge each other. For banks to make a profit, banks pay you a little less than LIBOR. The one-month Libor rate is what savings account follow, while longer-rates are what CDs follow. 

A few tenths of a point above the fed funds rate is what Libor usually is. The return you receive on your savings accounts and CDs should remain the same through 2021 as a result. 

Rates of Credit Cards

The prime rate is where banks base credit card rates.  For best customers with short-term loans, it is what they charge. Compare to fed funds rates, it is three percentage points higher. Depending on your credit score and the type of card, banks can charge anywhere from 8 percent to 17 percent more for credit card rates. 

Over the next two years, you can expect these rates to be stable. In case the rates get higher, it is a good idea to pay off any outstanding balances now. 

Adjustable-Rate Loans and Home Equity Lines of Credit

Adjustable-rate loans are what the fed funds rate guides. Home equity lines of credit and any variable rate loans are what these include. The cost of these loans rises together with the rise of the fed fund rate. To avoid any surprises over the next two years, pay them down as much as you can. Talk to your bank about switching to a fixed-rate loan where it makes sense. 

Short-Term and Auto Loans

The prime rate, Libor, or the fed funds rates are not followed by the fixed interest rates on three to five-year loans. Instead, compared to one, three, and five-year Treasury bill yields, they are about 2.5 percent higher. For holding the bills, yields are the total return investors receive. 

At an auction for a fixed interest rate that loosely tracks the fed funds rate, the U.S. Treasury sells Treasury bills, notes, and bonds and investors can then sell them on a secondary market. Their yields are influenced by many other factors. The demand for the dollar from forex traders include these. The demand for Treasury rises when the demand for the dollar rises. Investors invest more to buy them. The overall yield falls since the interest rate doesn’t change. 

When there are global economic crises, the demand for Treasury also increases because the U.S government guarantees repayment. Same as those based on the fed fund rates, interest rates on long-term debt are not easily predicted because of all these factors. 

It is best to keep your fixed-rate loans when rates are rising since rising interest loans won’t affect them. But if you need a new loan, it is better to grab the opportunity now and apply for one before rates rise further. 

Student Loans and Mortgage Rates

The yields on 10-yr, 15-yr, and 30-yr Treasury bonds are lower than fixed rates on conventional mortgages fixed by banks. Along with those yields, interest rates on long-term loans rise. And that’s the same with student loans. Treasury notes yields are what mortgages interest rates closely follow. 

It is not the perfect time to refinance a fixed-rate mortgage for an adjustable income. Do not get an adjustable-rate mortgage just to afford a bigger house if you are planning to buy a new home. Even if it means that you can only afford the smaller house, it is better to get a fixed-rate loan. 

Bonds

For investors’ dollars, municipal, state, and corporate bonds compete with the U.S. Treasury. They must pay higher interest rates than Treasury since they are riskier than U.S government bonds. That is a fact for all other types of bonds. 

The risk of default is Standard & Poor’s rate. High-yield bonds that have the most risk, pay the most return. These bonds remain competitive when the Treasury yields rise. 

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