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What You Need to Know About Rising Interest Rates

As the Federal Reserve continues to hike rates, the cost of borrowing also climbs—but there are financial pluses as well.



THE FEDERAL RESERVE HAS RAISED RATES seven times in the last three years—and that pace may well continue. “The Fed forecasts two more hikes this year, three in 2019 and several more in 2020,” say Matt Diczok, head of Fixed Income, and David Litvack, head of Tax-Exempt Strategy, for Merrill Lynch Wealth Management, in "The Real Impact of Rising Rates," a report from our Chief Investment Office.

What could that mean for your wallet—and investments? Check out the infographic below for a snapshot of how rising rates could affect your finances in a range of areas. For more detailed insights and tips, read on, and then dive into Diczok and Litvak’s report.

 

Rising interest rates could add about $75 to $120 per month to the mortgage payment of a median-priced home in the next 12 to 18 months.

Real Estate
Rising interest rates could add about $75 to $120 per month to the mortgage payment of a median-priced home in the next 12 to 18 months. “This could make housing slightly less affordable and slow the last decade’s record refinancing activity,” say Diczok and Litvack. But even with these hikes, mortgage rates should remain at historically low levels. Expect rates on home equity loans or lines of credit to rise as well. If you’re in the market for one, consider obtaining a fixed rather than a variable rate,” says Marie Imundo, senior vice president of Mortgage Product Strategy, Global Wealth & Investment Management.

Consumer Credit
“Higher rates will have a more pronounced effect on new loans and credit accounts, as lenders pass on higher financing costs to consumers,” note Diczok and Litvack. But there are things you can do in anticipation of the higher cost of borrowing. For instance, homeowners could consider consolidating and paying off higher-interest credit card debt with a lower cost home equity loan or line of credit, suggests Imundo.

Student Loans
Interest rates on undergraduate loans are set to increase from 4.45 to 5.05% for the 2018-2019 academic year. The majority of existing student loans are fixed rate loans, but students with variable rate loans will feel the pinch. Consider refinancing to get a fixed rate.

Interest rates on undergraduate loans are set to increase from 4.45 to 5.05% for the 2018-2019 academic year.

Investments
“Rising interest rates have the potential to create higher investment returns and a bump in the interest you receive on your savings,” say Diczok and Litvak. “We believe most investors should welcome higher rates–especially the most risk-averse investors, including some retirees,” say Diczok and Litvack.

This is the first time in a decade that an investor can essentially keep pace with inflation on short-dated risk-free fixed income assets, they note. “For example, a 3-year short-dated corporate bond portfolio currently yields approximately 3.4%, which is 1% above inflation.”

As for stocks, rising rates shouldn’t impact equity performance negatively, they add. “We believe that a resilient economy, moderate inflation, strong employment, and an increase in capital expenditures should keep markets well-positioned to deal with these higher yields.”

The Bottom Line
Rising rates are a sign of a strong economy, they note. “Talk with your advisor about whether it might make sense to adjust your investment strategy in this rising rate environment. And consider consolidating any existing debt into a lower rate loan before rates climb higher,” they suggest.


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