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What to do before rates rise
The Federal Reserve isn’t expected to raise rates on Wednesday, but the committee remains on track to raise rates once more in 2017 and a number of times over the next couple of years.
Smart consumers can get their financial house in order before rates climb. Here’s what to know.
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What the Fed actually controls
The Federal Reserve can’t actually “set” interest rates for financial products.
When the Fed “raises interest rates,” what it’s actually doing is boosting the target of one specific rate — the federal funds rate. This is the rate that banks charge one another for overnight loans.
Because the federal funds rate is basically the “cost” of money for banks, as the federal funds rate rises so does the “price” of all bank loan products.
For example, the prime rate tends to be set at 3 percentage points above the federal funds rate. The prime rate is then used as a benchmark for many short-term financial products, including credit cards and home equity lines of credit.
Keep track of leading rates such as the federal funds rate and prime rate.
Are you ready to get a loan? Get your free credit score at myBankrate.
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Check out mortgages
The Federal Reserve exerts an indirect influence on mortgages. When the Fed raises rates, mortgage rates can jump as well.
When interest rates rise, consider your home first. On a $200,000 mortgage, half of 1 percentage point of interest means a difference of $20,000 or more over 30 years.
If you’re on the fence about buying or refinancing, now is the time to act. Compare mortgage rates in your area now.
However, just because rates are low doesn’t mean you should take out a mortgage without thinking everything through.
Experts recommend: If you are in the market to buy a house or to refinance your mortgage, act sooner rather than later.
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Watch for rising HELOC rates
Home equity lines of credit have variable rates that are linked to the prime rate. That means HELOC rates rise when the Fed increases the federal funds rate.
In contrast, rates on fixed-rate home equity loans don’t respond directly to the Fed. They are set by the market forces of supply and demand.
Compare rates on home equity lines of credit in your area.
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Refinance credit cards before rate hike
Credit cards are closely tied to the federal funds rate. If you’re carrying a balance on a card, it might make sense to roll that balance into a low-interest card or home equity loan. Shop for a balance transfer credit card today.
But beware. If that credit card debt came from overspending, simply consolidating it into another loan won’t solve the underlying problem.
If overspending was the cause, move cautiously when consolidating. Otherwise, the problem will just continue.
Experts recommend: Take advantage of historically low interest rates to refinance high-interest cards, but do this only after you fix your spending problems.
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Gradual rise in deposit-account earnings
Savings accounts, certificates of deposit and money market accounts move nearly in lockstep with the federal funds rate. As the Fed pushed down rates, your savings account was one of the first places you felt that drop; vice versa when they rise.
Since the Fed is likely to raise rates gradually, the increases in deposit account rates likely will be gradual also. But that doesn’t mean you shouldn’t be saving money in these ultra-safe vehicles.
Experts recommend: Keep three to six months’ worth of expenses stowed away in an emergency fund. Those reserves should be placed in accounts insured by the Federal Deposit Insurance Corp. or the National Credit Union Administration.
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Consider a car loan before rates jump
Although it isn’t a direct relationship, a low federal funds rate does help keep interest rates for auto loans low.
Interest rates for auto loans also depend on factors such as your credit score, the price of the car and the overall terms of the car sale.
Rather than shopping for cars based on interest rates, figure out what you can afford each month.
Experts recommend: Finance that car purchase now, before rates rise, but only if buying a vehicle fits into your larger financial picture. Also weigh factors such as the down payment and maintaining a good credit score to keep your loan amount lower.
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Student loans are not affected by the Fed
The market does not set interest rates on federal student loans — the U.S. Congress does.
However, if you want to get rid of your debt faster, you may be able to pay them off by taking out another loan, such as a home equity loan or a personal loan that may have a lower interest rate.
But take into account the tax benefits of student loans. Plus, in some cases these loans can be canceled, forgiven or discharged.
Experts recommend: Take out student loans wisely if they will lead to future opportunities. But talk to an adviser before rolling them into another loan instrument.
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Stock and bond markets could take a hit
With interest rates still low, you may feel tempted to borrow money to play the stock market.
Don’t. Even though the current bull market has lasted more than eight years, it’s impossible to predict what will happen in the future.
Experts recommend: Invest cautiously in the stock market, but don’t borrow money to invest.