Interest Rate Hike Incoming: 4 Things You Can Do to Get Ready

For credit card holders, interest rate hikes are never good news. Unfortunately, that’s what’s looming on the horizon.

It’s been widely reported that the Federal Reserve is contemplating an increase to the benchmark interest rate in mid-March, the first of an expected three rate increases in 2017.

Higher interest rates from the Fed ultimately translate into higher interest on your credit card debt and more money out of your pocket.

But that doesn’t have to be the case. Financial advisers suggest a variety of preemptive measures to avoid being impacted by the rising rates, or to at least soften the blow.

1. Pay Off Balances as Quickly as Possible

We’d all pay off our credit card balances now if we could, right? If you don’t have the cash to clear your cards of debt before rate hikes set in, try to pay a little more each month than you typically do, said Aaron Aggerwal, assistant vice president of credit card lending at Navy Federal Credit Union.

“If your minimum payment is $30, but you can afford to put down $40, that small bit will make a big impact down the road,” Aggerwal said.

2. Transfer Balances to a Zero-Interest Credit Card

There are varying schools of thought regarding the wisdom of transferring balances to credit cards with zero-interest introductory rates.

Michael Foguth, of Michigan-based Foguth Financial Group, said it’s a savvy approach when the alternative is paying interest on your debt each month.

“Play these companies against themselves,” he said. “If you’re a consumer and you have a balance on a credit card, and you’re paying an interest rate on that balance, go out and find someone who will buy your business…Why pay 3% when there’s zero out there? When zero is out there, go after zero.”

However, Foguth urges consumers to research various offers and figure out which one is best when considering a balance transfer. Ideally, it’s one that does not charge a transfer fee.

Also be sure to check your credit score to see if you can qualify for a balance transfer card. You can view two of your scores free, updated every 14 days, on Credit.com.

Kerri Moriarty, of Boston-based Cinch Financial, also advises consumers do the math before jumping into a zero-interest balance transfer.

“Before you make the decision to transfer…calculate how much you will have to pay each month to get rid of the debt before the zero interest expires,” Moriarty said.

If you can’t pay the debt in full before that zero interest elapses, it may not be a good idea. Often the regular interest rates for these cards are higher than what you’re paying on an existing card, Moriarity said.

What’s more, balance transfer cards are designed to get you hooked. You start spending money at zero percent and forget to stop when the introductory rate is gone.

3. Consider Using a Home Equity Loan to Pay Credit Card Balances

Another option Foguth suggests is taking a home equity loan to pay your credit card debt before the interest rate hikes take effect.

There are two big reasons why this makes more sense financially than leaving the debt on a credit card. The first is that the interest on a home equity loan is tax deductible, Foguth said. The second reason is the lower interest on home equity loans.

“The interest on credit cards is often 15% to 20% and on a home equity loan it’s around 4%,” said Foguth.

But again, you must be disciplined.

“You don’t want to go back out and rack up $50,000 of debt,” Foguth said. “If you’re going to take money out on your home, you have to pay the monthly bill.”

4. Utilize Your Cash Rewards to Make Even More Credit Card Payments

One last suggestion from financial experts to help pay down your debt as quickly as possible – use your cash rewards to make additional payments, if you have a cash-back credit card.

This approach isn’t likely to make a huge dent in the average American’s credit card debt, but as Aggerwal noted earlier, every little bit counts.

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How the Fed’s Interest Rate Hike Could Impact Your Finances

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It’s widely expected that the Fed will raise interest rates this month, but we won’t know for sure until they meet December 13 and 14. The last time the Federal Reserve raised its benchmark interest rate was a year ago, when it voted to raise the rate from .25% to .5%.

Why should we care?

Consumers should be aware of the rate hike for a simple reason: Lenders and banks base their interest rates on the federal funds rate, so when the benchmark increases or decreases, it can impact rates on products like credit cards, auto loans, mortgage rates, and more.

So, what could change for you?

Mortgage Rates

Cheryl Young, a chief economist at Trulia, says homebuyers don’t need to be terribly worried about an increase in the federal funds rate.

“Don’t rush into a home purchase decision because you think that rates are going to go up,” said Young. “Make sure to take your time and don’t get driven into a hasty decision based on what may or may not happen with rates.”

A Trulia report released Wednesday shows homebuyers are more concerned about saving for a downpayment than rising mortgage rates. Young  says if you are renting and thinking about buying, for the majority of market, buying still makes more financial sense. In fact, mortgage rates would have to double in order to make renting more affordable on the whole.

Existing homeowners and people who are preparing to buy a home soon should take the opportunity to lock in today’s low rates before they rise, says David Demming, CEO of Demming Financial Services in Aurora, Ohio.

Buy when things are cheap,” said DemmingIf you are getting your first house, don’t drag your heels, so that you can lock in the low rate right now. Some lenders will give you a 10-year fixed rate and you should take advantage of those.”

Those who have a balance on a home equity line of credit, or HELOC loan, may want to make some aggressive payments now, warns Margarita Cheng, the CEO of Blue Ocean Global Wealth in Rockville, Md.

“When the prime rate goes up, the interest rate on a home equity line of credit will float up,” says Cheng.

Credit and Savings

“The costs for the credit card lender increases when the benchmark rates go up, so they are then tempted to raise rates on short term loans like credit cards,” says Chris Chen, Wealth Strategist at Insight Financial Strategists in Waltham, Mass.

There is some good news, although it may not be what you wanted to hear. The interest rates on credit cards are already high — currently 15% on average. Even if the Fed raises rates by another .25%, credit card users likely won’t notice.

For savers, however, a rate hike could be good news. You might start to earn more on the cash you have stashed in savings accounts, Money Market funds and CDs. Rates on these products are much lower than prior to the recession but a fed rate hike might make them “just a teeny bit less unattractive,” says Chen.

Car Loans

Car loans are one of those short-term loans you can expect to be influenced by a rise in the funds rate, but borrowers likely won’t feel much of a sting.

To get the best rate on a car loan, you should shop around for a low rate first, then make sure to negotiate the price of the vehicle. Interest rates on car loans are fixed, so if you do that, you’ll be set for a while. Heads up: the current average rate on a 60-month auto loan for a new car is 4.27%.

Investments

Bonds react inversely to the federal funds rate. When interest rates go up, the price of a bond goes down.

“To what degree, we don’t know,” Cheng says. “But that’s why it’s important to be prepared and have diversified investments.”

Don’t panic just because some of your bonds could lose value, adds Kristi Sullivan, the CEO of Sullivan Financial Planning. It’s all part of the cycle.

The Bottom Line

Whether or not the Fed’s December meeting results in an increased funds rate, you should think about your entire financial picture. The general expectation is that rates will continue to increase as the economy strengthens. Keep an eye on your interest rates and maintain a diverse portfolio and you should be prepared for whatever happens.

 

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Can I Get a Mortgage With Student Loan Debt?

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OK, so you’ve graduated college, gotten a decent job and would absolutely love to buy a house. You might even be crashing open houses in the neighborhoods on your buy list, binging on pretzels and chatting with real estate agents just to get the warm fuzzy associated with buying your own piece of the planet. The only problem is, you’re one of the 43 million people in this country who is strapped with student loan debt, and you’re dragging it around like a ball and chain.

Is it still possible to get a mortgage?

Yes, it is possible to get approved for a mortgage with student loan debt — in fact, it might even be easier to secure a mortgage because you have already established a credit history with your student loans, said Brendan Coughlin, head of consumer lending at Citizens Bank.

Hopefully, you’ve been regular with your student loan payments to keep your credit score as high as possible, which will reflect favorably on your mortgage rate and application process. A bad credit score, whether related to missed student loan payments or otherwise, can make it harder to secure a mortgage, at least at an affordable interest rate. (It’s prudent to check your credit before buying a home, and you can see two of your credit scores for free, updated every two weeks, at Credit.com.)

Is a Mortgage’s Interest Rate Higher With Student Debt?

There’s no set formula that says your interest rate will be a point higher with, say, $30,000 in student loan debt, because they’re calculated on a person-by-person basis, said Coughlin.

“When applying for a mortgage, lenders look at a potential borrower’s overall creditworthiness, their ability to pay back the amount they are looking (to borrow), as well as any collateral they have. However, unless you have substantial student loan debt, it is unlikely to impact your interest rate significantly, if at all,” said Coughlin.

But, generally speaking, when it comes to debts and mortgages, you’ll get a lower rate the less debt and the better credit that you have, said Mindy Jensen, community manager of BiggerPockets.com, a real estate networking and information site.

“The lender looks at your debt-to-income ratio, and it can be no higher than 39 to 43%, typically,” Jensen said. “The lower, the better, so if you’ve got significant student loan debt but a low-paying job, you’re going to have a much harder time.”

Student loans can also affect how much mortgage you can qualify for, so you’ll want to talk to a loan officer before you start shopping for a house, said Jensen.

They can also affect your ability to come up with a sizable down payment — which helps to keep your loan payments lower over the course of the loan. Lenders usually prefer people who are able provide large down payments — if you can’t, then high student loan debt coupled with a low down payment will make you look like more of a risk to lenders, said Jensen.

“The closer you are to a 20% down payment, the better your borrower status or the less risky you appear,” she said.

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Mortgage Rates Hit 2016 Low: Is Now the Time to Buy?

Could This Mortgage Innovation Help You Buy a Home?

Here’s some good news for current house hunters: Mortgage rates hit a new low for the year last week. In fact, rates on a 30-year fixed mortgage are at the lowest mark since May 2013, according to the latest mortgage market survey from Freddie Mac.

The 30-year fixed-rate mortgage averaged 3.58% with an average 0.5 point for the week ending April 14, 2016, the mortgage purchaser reported. This rate is down from the prior week when it averaged 3.59%, and from a year ago when it averaged 3.67%.

Meanwhile, the 15-year fixed rate mortgage averaged 2.86% with an average 0.5 point, down year-over-year from an average of 2.94%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.84% with an average 0.4 point, down from 2.88% this time last year.

The weekly survey is based on responses Freddie culls from about 125 lenders on the rates and points for their most popular mortgage products.

What’s Going on With Rates?

It was widely expected that mortgage rates would gradually rise in 2016 after the Federal Reserve began it’s long-speculated move to raise the benchmark federal-funds back in December. (As a quick refresher: the Fed’s benchmark federal-funds rate determines how much interest financial institutions pay to borrow from one another — and when it goes up, so does the prime rate, the lowest rate lenders will charge their most creditworthy consumers.)

The current decrease in mortgage rates is related to an unexpected increase in global demand for 10-year Treasuries at the beginning of the year amid global jitters over stagnating growth in China and its ripple effects, among other things, Lynn Fisher, Vice President of Research and Economics at the Mortgage Bankers Association (MBA), said.

But, barring another unexpected increase, further moves from the Fed should push long-term rates upward.

“MBA currently forecasts the Fed will make two more moves to increase rates this year, with the first rate hike forecasted for the June meeting,” Fisher said in an email.We think that mortgage rates will rise gradually through the end of the year, averaging about 4.2% in the fourth quarter.”

Should I Buy Now?

For those thinking about buying a home in the very near future, it could be good to move on your purchase “to ensure getting a low-rate now” rather than face “the uncertainty in the future,” Heather McRae, a senior loan officer for Chicago Financial Services, said.

Still, prospective homeowners shouldn’t feel inclined to speed up their search or rush to make a decision, because interest rates are just one piece of the home-buying puzzle.

Home prices, for instance, tend to be higher in low-rate environments and fall in higher-rate environments as financing gets less affordable and demand goes down, Scott Sheldon, a senior loan officer at Sonoma County Mortgages and a Credit.com contributor, said. So, buying now could get you a lower interest rate, but waiting could get you a better deal on the home’s purchase price.

At the end of the day, “you’ve got to kind of watch out for yourself,” Sheldon said. “You have to make a decision based on what you feel you can handle.”

Generally speaking, before shopping for a mortgage, you want to make sure you can meet down payment requirements, handle monthly mortgage expenses and safely cover other ancillary costs, like real estate agent fees, property taxes, home insurance, and repairs, to name a few.

You also want to be sure your credit score is in tip-top shape. Scores of 740 and higher generally earn the best terms and conditions on a mortgage, so, if you fall below that line, you may want to work on improving your credit score before you seriously look to buy a home. You can pull your free annual credit reports each year at AnnualCreditReport.com or see your credit scores for free each month on Credit.com to learn where your credit currently stands.

More on Mortgages & Homebuying:

Image: monkeybusinessimages

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Mortgage Rates Hit 2016 Low: Is Now the Time to Buy?

Could This Mortgage Innovation Help You Buy a Home?

Here’s some good news for current house hunters: Mortgage rates hit a new low for the year last week. In fact, rates on a 30-year fixed mortgage are at the lowest mark since May 2013, according to the latest mortgage market survey from Freddie Mac.

The 30-year fixed-rate mortgage averaged 3.58% with an average 0.5 point for the week ending April 14, 2016, the mortgage purchaser reported. This rate is down from the prior week when it averaged 3.59%, and from a year ago when it averaged 3.67%.

Meanwhile, the 15-year fixed rate mortgage averaged 2.86% with an average 0.5 point, down year-over-year from an average of 2.94%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.84% with an average 0.4 point, down from 2.88% this time last year.

The weekly survey is based on responses Freddie culls from about 125 lenders on the rates and points for their most popular mortgage products.

What’s Going on With Rates?

It was widely expected that mortgage rates would gradually rise in 2016 after the Federal Reserve began it’s long-speculated move to raise the benchmark federal-funds back in December. (As a quick refresher: the Fed’s benchmark federal-funds rate determines how much interest financial institutions pay to borrow from one another — and when it goes up, so does the prime rate, the lowest rate lenders will charge their most creditworthy consumers.)

The current decrease in mortgage rates is related to an unexpected increase in global demand for 10-year Treasuries at the beginning of the year amid global jitters over stagnating growth in China and its ripple effects, among other things, Lynn Fisher, Vice President of Research and Economics at the Mortgage Bankers Association (MBA), said.

But, barring another unexpected increase, further moves from the Fed should push long-term rates upward.

“MBA currently forecasts the Fed will make two more moves to increase rates this year, with the first rate hike forecasted for the June meeting,” Fisher said in an email.We think that mortgage rates will rise gradually through the end of the year, averaging about 4.2% in the fourth quarter.”

Should I Buy Now?

For those thinking about buying a home in the very near future, it could be good to move on your purchase “to ensure getting a low-rate now” rather than face “the uncertainty in the future,” Heather McRae, a senior loan officer for Chicago Financial Services, said.

Still, prospective homeowners shouldn’t feel inclined to speed up their search or rush to make a decision, because interest rates are just one piece of the home-buying puzzle.

Home prices, for instance, tend to be higher in low-rate environments and fall in higher-rate environments as financing gets less affordable and demand goes down, Scott Sheldon, a senior loan officer at Sonoma County Mortgages and a Credit.com contributor, said. So, buying now could get you a lower interest rate, but waiting could get you a better deal on the home’s purchase price.

At the end of the day, “you’ve got to kind of watch out for yourself,” Sheldon said. “You have to make a decision based on what you feel you can handle.”

Generally speaking, before shopping for a mortgage, you want to make sure you can meet down payment requirements, handle monthly mortgage expenses and safely cover other ancillary costs, like real estate agent fees, property taxes, home insurance, and repairs, to name a few.

You also want to be sure your credit score is in tip-top shape. Scores of 740 and higher generally earn the best terms and conditions on a mortgage, so, if you fall below that line, you may want to work on improving your credit score before you seriously look to buy a home. You can pull your free annual credit reports each year at AnnualCreditReport.com or see your credit scores for free each month on Credit.com to learn where your credit currently stands.

More on Mortgages & Homebuying:

Image: monkeybusinessimages

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