Rising interest rates in 2014 and 2015
The Federal Reserve is finalizing it’s tapering its bond-buying program, a program that kept the lid on long-term interest rates in an effort to stimulate what has been a relatively weak economic recovery.
Experts expect that move to continue pushing mortgage rates up in 2014 and 2015.
“It’s really the worst of all worlds for consumers,” says Richard Barrington, or MoneyRates.com. “There’s always a spread between mortgage rates and deposit rates, but it’s wide now and will get wider this year.” It’s been particularly tough on retirees who rely heavily on fixed-income investments like bonds and CDs.
Still, there are smart ways to make the most of today’s rate environment. Depending on your situation, here’s what you need to know about interest rates in the coming year.
Homebuyers: Last year, interest rates snapped a seven-year downward streak, rising nearly a full percentage point over a few months during the summer. Today’s 30-year fixed rate mortgages are running about 4.0 percent, and they’re expected to pass the 5-percent threshold by the end of 2015, according to the Mortgage Bankers Association. That may not seem like a huge jump, but every extra point on a mortgage decreases buying power by about 10 percent.
When mortgage rates go up, buyers instantly lose purchasing power, however there typically is a lag in time until sellers realize their property is worth less. The time to buy/sell is now before rates go up. When interest rates rise, values fall.
It’s never a good idea to rush into buying a home, but if you’re thinking about doing so in the near future, it’s going to be cheaper sooner rather than later. Once you have a contract, it’s important to lock in your mortgage rate right away. “I wouldn’t pay for the extended rate lock, but once you’re in the window and you have a closing date, don’t gamble,” says Greg McBride, a senior financial analyst with Bankrate.com.
Consumers with weaker credit may see their rates go up. Those in this category should focus on paying down their debt, boosting their credit score to get access to the more attractive cards and programs.
Bond Investors: Bond prices tend to fall when rates rise, which can be bad news for anyone with a portfolio heavily invested in them. “Bonds are going to be tricky in 2014 and on after that,” says Casey Bond, managing editor of GoBankingRates.com. “They’re not going to be the safe haven that people look for them to be.”
If you own individual bonds and plan to hold them to maturity, then it doesn’t matter what rates do. Avoid Treasuries, which are directly impacted by the Fed’s taper. When it comes to bond funds, look for those with a shorter-term duration, since long-term bonds are less sensitive to interest rate movement, although they offer a lower yield.
Savers: As anyone with a savings account knows, rates are appalling low right now (the average savings account rate is just 0.11 percent). “It’s a more favorable environment to borrow than to save right now,” says Alan MacEachin, an economist with Navy Federal Credit Union. “That’s exactly what the Fed wants. They want people out spending rather than saving.”
Online banks and credit unions are offering slightly higher rates, so it’s worth shopping around to see if you can find an account offering closer to 1 percent in interest. With such low rates, it becomes even more important to make sure you’re using a bank with minimal fees; otherwise you’ll completely wipe out any paltry interest payments you do receive.
Another option for savers is to look into either very short-term CDS or longer-term CDs that have a very low early-withdrawal penalty. Some longer-term CDs charge a few months interest to access your cash before the CD has matured, making it easier to cash out and get a better deal if rates start ticking up.