If the economy continues to stage a slow but steady recovery, interest rates are expected to rise. But we're all wondering when and by how much? Those will be the big questions as both borrowers and savers try to navigate the financial landscape in the year ahead.
Some rates already rising
A key interest rate controlled by the Federal Reserve -- the federal funds rate -- is not expected to increase again until 2015. But a variety of other rates that have more of a direct impact on consumers are set by the marketplace and have already been moving. Last year, for example, mortgage interest rates staged a rapid and surprising surge after Federal Reserve Chairman Ben Bernanke signaled a possible earlier-than-expected pullback in the Fed's asset purchases.
What's next for interest rates?
Some rates are on the move, but borrowers shouldn’t fear big shocks and savers shouldn't get their hopes up.
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Mark Hamrick: From Bankrate.com this is Your Money This Week. We connect the dots between what's happening in the world and your wallet. I'm Mark Hamrick reporting from Washington.
What's in store for interest rates this year? While the Federal Reserve has signaled its keeping rates steady in the near term, many of the rates you actually have to pay are set by the marketplace. Their direction can mean the difference between having to pay more or less. So, getting ahead of their movement or knowing what to expect could be helpful. We'll check in with Bankrate's very helpful Greg McBride on the outlook, and our Doug Whiteman provides some tips on buying a second home. All of that and more coming up on Your Money This Week.
Trying to navigate the twists and turns of the financial market can be a challenge even for the most seasoned participant. So now that we've turned the corner on the New Year, it's a good time to try to look ahead and gauge the outlook on interest rates; the rates used by borrowers and savers alike. For that, we turn to Greg McBride, Bankrate's chief analyst. He's also a Chartered Financial Analyst. To begin, I asked about the outlook for mortgage rates in the year ahead.
Greg McBride: The likelihood is that we're going to see a slow, steady, grind higher in mortgage rates throughout the year, provided two things: that the economy continues on a track toward recovery; and that the Federal Reserve is able to start and able to keep dialing back their bond purchases. If we hit both of those marks, I expect mortgage rates will get above 5 percent the first half of the year and could touch as high as 5 1/2 percent in the back half of 2014.
Mark Hamrick: And for people who aren't watching this on a day-to-day or weekly basis, where have mortgage rates been, let's say, over the last 12 months?
Greg McBride: Mortgage rates saw a big spike in 2013. They jumped more than a full percentage point throughout the course of the year, but the bulk of that came in about a six-week span in the middle of the year in a May/June time frame. I think, in contrast to that, we'll see rising rates here in 2014 at a slower, steadier pace, not the rapid spike that we had seen in 2013.
Mark Hamrick: And we know that sales of previously owned homes have essentially flattened out, partially in response to the rise in mortgage interest rates, so do you think that we'll continue to see some changes in the complexion or the composition of sales in the housing market?
Greg McBride: I still think housing is going to be a plus for the economy and these rising mortgage rates, as long as they come at that measured pace, we don't see the big spike that we saw last year, and in the context of an improving economy, I don't think it's going to impair the housing market or the broader economy. After all, it's the better economy that gets people to buy houses. When mortgage rates were at record lows, they were at record lows because the economy was in bad shape. When the economy is in bad shape, nobody wants to buy a house. So again, I think as long as the economy is in recovery, and that's why we're seeing higher mortgage rates, it shouldn't deter people from buying homes.
Mark Hamrick: So let's go down the list of areas where people may essentially have a to-do list that relates to at least potential borrowing. And I suppose after mortgages, we might look at home equity or home equity lines of credit.
Greg McBride: Home equity lines of credit: The good news is that rates aren't going to go anywhere this year. In fact, if anything, they're not only going to stay low, I think you're going to see a lot of competition among lenders because of the fact that home prices are rising, so people have more equity to borrow from. Mortgage rates are up, so home equity lines of credit are going to be the vehicle that people tap to get into the equity of their home. There's going to be a lot more competition from lenders, and I think enhanced demand from consumers; should be a good year on that front. Home equity loans fixed-rate products: I do expect you'll see those rates moving higher at a slow, steady pace during the year.
Mark Hamrick: Like the mortgages. Obviously, we've seen strong demand for automobiles and, by extension, trucks. What about people who are going out to buy a new or used vehicle?
Greg McBride: 2013 saw record lows in auto loan rates. The good news is 2014, I think you're going to see rates stay pretty close to those levels. You're still going to see a lot of those sub-4 percent rates for both new and used car loans. So, for people that have put off buying a car because money was tight for a few years, and if this is the year they're having to do so, the financing landscape will be favorable.
Mark Hamrick: And, paper or plastic? So what about credit card borrowing?
Greg McBride: The good news is with the Federal Reserve holding short-term interest rates steady, you're not going to see a wholesale move in credit card rates. But what you see is going to be vastly different, depending on which end of the credit card spectrum you are on. Consumers with strong credit are going to continue to see those rock-bottom rate offers. They're going to continue to see those 0 percent balance transfer and purchase offers, many of which last as long as 18 months. At the other end of the spectrum, consumers that have damaged credit -- they have some recent slow pay or defaults -- different story. They're not only going to continue to pay those double-digit interest rates, but if anything, they'll see those rates moving higher throughout the year not lower.
Mark Hamrick: So low rates, as we say so often here at Bankrate, are obviously positive for borrowers. The other area where it has been a persistent negative in recent years has involved savings. So does the saver whose been getting such measly returns in recent years get anything better in the year ahead?
Greg McBride: It's going to be another tough year for savers. Savings accounts, money markets, short-term CDs -- don't expect much in the way of improvement. Those yields are going to stay in the basement throughout 2014. The one area where you could see some improvement are on longer maturity CDs. So you're talking the three-year, the four-year, five-year maturities; you could see those moving up slightly, particularly in the latter half of 2014, but I'll caution (that) I think the movement is going to be pretty modest, and because we are recovering from such lows, it is not going to bring you to the point where they become compelling investments anytime soon.
Mark Hamrick: So, for people who are out there thinking about readjusting or just engaging in some borrowing, savings, etc. -- some lending activity -- what is the main thing that they want to keep in mind for the year ahead?
Greg McBride: The Federal Reserve is not going to boost short-term interest rates this year, but the days of these rock-bottom short-term rates are numbered. So, 2014 could be your last hurrah to pay down variable-rate debt like credit cards or home equity lines of credit in an environment where you have the tail wind of low interest rates rather than the head wind of rising interest rates. So, this could be the year to really make a dent in those balances.
Mark Hamrick: Greg McBride. Thank you.
Greg McBride: Thank you, Mark.
Mark Hamrick: Greg McBride, Bankrate's chief analyst. We spoke in Washington.
If you are in a position to buy a second home, what do you need to know? Bankrate's Doug Whiteman tells us what is often a luxury purchase often requires some different thinking, say, compared to buying your first home.
Doug Whiteman: If you've been thinking about buying a second home this might be your chance, with interest rates still low and home prices still going through a bit of a recovery. But how do you make the leap?
Start your second home quest by lining yourself up with a real estate agent who knows the area where you would like to spend some of your time. Factor in how much it might cost to have someone keep tabs on the place for you while you're not there. If a vacation home at the beach is what you are looking for, flood insurance will be a must, so be sure to consider that expense. Think about the tax implications. You might qualify for a tax deduction on the mortgage interest and property taxes. But if you rent out your second home, that rental income will be taxable. Securing financing may not be difficult, and you may even want to tap into your primary home's equity to fund your purchase. But be warned, you may want to keep that equity handy in case of emergencies. For more on how to buy a second home visit Bankrate.com. I'm Doug Whiteman.
Mark Hamrick: Finally, our look at this week in business history. January 22nd, 2002: Retailer Kmart filed for Chapter 11 bankruptcy protection, with some 2100 stores at the time. Kmart would find a second lease on life only after several hundred stores were closed and thousands of workers let go. It would re-emerge and purchase Sears. All these years later, however, questions remain about the viability of the retail operation that combine Sears and Kmart.
You've been listening to Your Money This Week. If you enjoyed the podcast, please check us out on iTunes and rate and subscribe to the program. We're hoping that you can help us get the word out. Also, check out our other podcast, Special Report, with breaking news and special features.
For more on this and other personal finance issues, visit Bankrate.com, and you can follow us on Twitter @Bankrate and I'm @Hamrickisms. Thanks to producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
Rates on 30-year fixed-rate mortgages could rise as high as 5.5 percent this year, says Bankrate chief analyst Greg McBride. That's nearly a full point above the current average in Bankrate's weekly survey: 4.57 percent. As for auto loan, home equity lines of credit and credit card rates, little change is expected in the coming year.
Not so great for savers
So, while the news isn't bad for borrowers, savers don't have much to look forward to. McBride says rates for savings and money market accounts and short-term certificates of deposit will likely "stay in the basement throughout 2014." Bankrate's latest weekly survey finds that yields for both one- and five-year certificates of deposit remain below 1 percent.
What do you think of the interest rate forecast? Are you encouraged by the outlook for borrowers? Are you saving despite low rates of return?
Follow me on Twitter: @Hamrickisms.