You may have seen headlines indicating that interest rates will rise next year. If inflation rates go up, that means interest rates probably will as well. Lenders demand these higher interest rates as compensation because the purchasing power of the money they get back from loans decreases.
What does this mean for you? We’ll break down how rising interest rates might impact your wallet in the coming year. There are three distinct areas where it will be noticeable.
1. HELOCs and Credit Cards
Higher interest rates usually mean your borrowing costs go up. What the Fed does matters to those with a Home Equity Line of Credit (HELOC) or who regularly use their credit cards. When the Federal Reserve hikes fund rates, it often means any entity that will lend you money will only do so with higher attached costs.
This is because rates are tied to any borrowing method you might use, and those can change. They generally go up or down along with inflation rate trends. If the Fed says they’re hiking those rates, it is almost always going to cost you more to borrow.
This means now is an ideal time to pay off any outstanding debt before those rates rise. You might use an early loan payoff calculator or a similar tool to help you accomplish that.
Higher interest rates can impact you positively as well. If the Fed hikes rates, and you have some money saved up in a CD or savings account, those savings should appreciate more than they have been recent.
If you already have your money in one of these vehicles, you can leave it where it is. If you don’t, you might consider your options and in those weeks and months following the Fed raising the interest rates. It may make sense to put a chunk of your money into a CD or savings account at that time.
3. Mortgage Costs
If you have an adjustable-rate mortgage, rising Federal Reserve rates can cause your monthly expense to go up. If you plan to get a mortgage next year, adjustable or fixed, you can expect higher monthly payments as well.
An adjustable-rate mortgage is more directly tied to what the Fed does. As the Fed hikes rates, it’s almost certain that your adjustable-rate mortgage will move in lockstep with it. Be ready for that as the calendar changes over to 2022.
Keep an Eye on What the Federal Reserve Does
If you are trying to budget for 2022, interest rates are worth watching, even if you have no control over them. Watch for headlines indicating exactly when the Federal Reserve is going to raise interest rates, and plan accordingly.
When that happens, be ready for credit card and HELOC rates to go up. Be prepared for your adjustable or fixed-rate mortgage to be a little more expensive as well. If you have some money in a savings account or CD, though, you could earn more in interest next year, and that’s something you and your wallet should definitely appreciate.