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As you’ve probably heard, the Federal Reserve Board has discussed raising the Federal Funds Rate at least three times this year. This rate isn’t the only factor affecting the interest rates you pay on loans, but when it rises, other rates tend to increase, too. What will that mean to your monthly loan payments? That depends largely on the type of loan and, particularly, whether it has a fixed or variable rate. Here, we share insights to help you plan for potential change.
The impact of rising rates will be different depending on whether you have an adjustable rate mortgage (ARM) or a fixed rate mortgage:
- ARM – As interest rates rise in general, your ARM rate, and therefore your monthly payment, is likely to rise, as well. Check your contract to see how much and how frequently your rate can change. Consider trying to pay down your mortgage sooner or refinancing to a fixed rate.
Home Equity Financing & Personal Loans/Lines
Home equity lines of credit (HELOCs) and personal lines of credit
- Fixed-rate mortgage – If you currently have a fixed rate mortgage, changing interest rates won’t affect you. If you’re considering a new home purchase or refinancing, it may prove wise to act soon before rates increase too much.
usually have variable interest rates. That rate is likely to rise — along with your monthly payment — although experts say the increases will come gradually. As with an ARM, review your contract for details of your line’s rate structure. The good news: With a line of credit, you’ll only accrue interest on the funds you’re using.
If you have a home equity loan or personal loan
, your payments probably won’t change, since these products usually have fixed rates. That may make them better financing options in a rising rate environment, although you’ll pay interest on the entire amount of the loan, regardless of how much you use.
Your Car Loan
- Note: One particular bonus with home equity financing is that the interest you pay may be tax deductible (consult your tax advisor).
Traditionally, auto loans have had fixed rates. If that’s the case for you, then you can relax knowing your rate and payment won’t change for the life of the loan. That said, some vehicle financing now has a variable rate. If you’re not sure which you have, check your paperwork.
If your car loan has a variable rate, you can expect your rate and monthly payment to increase. But take heart: Rates should stay fairly low overall and any increases should happen gradually. You also may be able to pay off the loan by taking out a fixed-rate financing option, such as a home equity loan.
If you have a federal government student loan that you opened in 2006 or after, your rate is probably fixed and won’t change. If you have a federal loan from before 2006, or a private student loan, check to see whether the rate is fixed or variable.
If it’s variable and you’re worried about rates and payments going higher than you can handle, you may be able to refinance into either a fixed-rate government or private loan. Be aware that if you move from a federal loan to a private loan, certain terms and features related to repayment may also change. Make sure to read all the details carefully.
Make Your Loan Plans Accordingly
For information on specific loan products or for additional insights and advice on how rising rates might affect you,visit your nearest branch
or call (800) 862-1998.
Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date. Equal Housing Opportunity