Debt · February 03, 2022

5 Points to Consider if Interest Rates Rise

The Federal Reserve is putting out clear signals that it intends to push interest rates higher this year, largely to curb inflation. So what, if anything, should you do?

The answer, of course, depends on your financial situation. Here are some areas you may want to focus on to respond to impending rate increases—and possibly even benefit from them.


1Refinance

Replacing adjustable-rate debt with a fixed-rate loan will lock in today's rates and avoid the risk of rising rates in the future. This might seem like a bit of a no-brainer, but there are factors to consider beyond just the interest rate, including mortgage origination fees, the length of your mortgage and other costs to determine whether refinancing makes sense for you.

For example, if you are 10 years into a 30-year mortgage, refinancing with a new 30-year mortgage means you have effectively extended your term to 40 years. This could cost you more than what you would have spent on the original mortgage. Also pay attention to closing costs. Origination fees and other fees and taxes can amount to thousands of dollars if you refinance a sizeable mortgage.

It's important to explore your options. For example, you might want to consider refinancing to a shorter term, particularly if you have a long-term mortgage. Generally, 15-year mortgages come with lower rates than 30-year mortgages carry. Your payments may be higher, but your total long-term interest expense may drop due to the shorter term.

You can also potentially cut expenses by shopping for mortgages with lower origination fees and closing costs. Such costs can vary widely depending on the type of loan you choose.

Once you have a particular refinancing proposal in mind, you can calculate your projected savings or losses over time with a refinancing calculator. You'll need to know the interest rates on the mortgages you want to compare, along with terms, the length of time you expect to be in your house and closing costs. This should give you a pretty good estimate of whether a refinance would save you money over the short or long term.

2Consolidate loans

If you're sitting on some high interest rate debt, you might want to consider using a less expensive loan to pay them off.

Consolidation loans can take many forms. This includes secured loans like home equity lines of credit, or HELOCs, and unsecured loans like personal loans. If your credit is good, you may be able to lock in a rate that is much more competitive than your current cards or loans. Don't overdo it, though—if you take out a loan that is secured by your home, make sure you can make the payments even if something unforeseen, like a job loss, enters the picture.

3Shop around for credit cards

Credit cards carry adjustable rates that are tied to a benchmark, such as the Federal Reserve's calculation of the prime lending rate. This means card rates will rise as interest rates in general rise, and they can be punishing. The median credit card rate was 19.49% on February 1, 2022, while the prime rate stood at just 3.25%.

Of course, the best way to deal with credit card debt is to reduce it. But if your credit is good—or at least better than it was when you got your current cards—shopping for lower rates can also pay benefits.

The rate break can be significant. The Federal Reserve tracks the rates on cards that a collection of banks offers to their best customers. They found that the national average stood at about 14.5% by the end of the third quarter of 2021, which is 5% lower than the general market median rate.

4Finish projects now

If you need to do some home repairs or have a renovation project in mind, now might be a good time to get your financing before the price of money goes up.

Home renovations can be financed with loans that are secured by your house, such as a fixed HELOC or home equity loan. If your credit scores are good, you could explore unsecured home improvement loans, which require no liens or appraisals.

5Consider your investments

If you're worried about rising rates impacting your 401(k) or investments, consider this: Rising interest rates are often a sign of an expanding economy, and investors tend to like this, as First Citizens Chief Investment Officer Brent Ciliano and Manager of Institutional Portfolio Strategy Phillip Neuhart noted in their Making Sense: November 2021 Outlook webinar. Over the past 30 years, US stocks have posted positive gains during all seven rising interest rate cycles, with an average cycle return of 17%.

This is not to say that future gains are guaranteed or that the road will be smooth or easy in the short run, Ciliano and Neuhart noted. Headwinds—including geopolitical tensions, high stock and bond valuations, or an unexpectedly long-lived bout of high inflation—could push against the markets' sails. Barring unforeseen events, they predict a generally rising market by the end of 2022, but investment prices are likely to be volatile as investors try to gauge the full extent of the year's events.

"It's difficult to make a blanket statement" about the right moves to make, Neuhart said, given investors' differing needs. He and Ciliano agree that the best advice in such turbulent conditions is to seek advice from a trusted professional.

You can view Ciliano and Neuhart's most recent market outlooks and webinars in the First Citizens Market Commentary.

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