As the economy heats up and interest rates rise, find out how to save money.Get the Money Girl book at http://MoneyGirlBook.com
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327 MG How Borrowers Should Handle Rising Interest Rates
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However, as the economy and housing market perks up, the tide is turning and rates are creeping back up. As interest rates rise, there are important financial decisions that borrowers need to make. I'll tell you how to save money even as the economy heats up. In order to understand how interest rates affect your finances, here's some basic background about what happens when rates rise. You probably already know that when interest rates go up, the cost to borrow money also increases. For instance, the monthly principal and interest payment for a 30-year, $200,000 mortgage at 3.5% is $898 per month, but the same loan costs $1,013 per month if the interest rate goes up to 4.5%. You'll pay $115 more per month for the same house if rates rise just 1%. Certainly, no one likes to pay more interest for a home, car, or credit card than they have to. However, the upside to rising interest rates is that banks earn more from borrowers and can pay out more interest to savers. That means you can earn more interest on the money you keep in savings, money market accounts, and CDs. Pricing interest rates can also affect equity investments in a positive way. Since corporations form the backbone of the economy, interest rates typically go up when they're doing well. Investors have the opportunity to share in their profits by owning stocks. For instance, let's say you buy 1,000 shares of company stock at $10 a share. If the stock price goes to $20 a share, you've doubled your money. You could sell the stock in pocket $10,000 before taxes. Now this isn't a complete description of the effects of interest rates in the economy because there are many factors at work. But my point is that rising interest rates don't always have a net negative effect on your personal finances. One of the best ways borrowers can deal with rising interest rates is to lock in current rates as quickly as possible. If you're in the market to buy a big ticket item, like a car or house, try to speed up the process as much as possible. The faster you get approved for a mortgage, home equity loan, or car loan, the better. When mortgage rates are ticking up daily, time is money. With the fixed rate mortgage, your interest rate and monthly payment can never change. So if you plan to own a home for the long run, consider a fixed rate loan that keeps your payment low even while interest rates are climbing. However, there's still a place for an adjustable rate mortgage or arm if you plan to sell the home within a few years or you get really favorable loan terms. Just remember that your interest rate and monthly payments can go up dramatically if you can't sell the property or refinance it down the road. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. We put a lot into the time we spend with our loved ones. 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We'll teach professional skills to help you pursue your goals, like business management, strategic planning and effective communication, and you can apply these skills right away. A different future is closer than you think with Capelli University. Learn more at Capella.edu. If you already have an adjustable rate mortgage, review the terms to find out when and by how much your rate can go up. For example, an arm might allow an interest rate adjustment every six months that can exceed two percent per year. Additionally, there are caps on how much your payment amount can go up, such as seven percent over the life of the loan. No matter if you have a fixed or variable rate mortgage, always crunch the numbers when interest rates are rising and see if refinancing can save you money. You need to know the total cost to refinance and how much you'll save each year. A typical refinance might cost anywhere from one to five percent of your outstanding loan balance, the fees to close a loan vary depending on the lender and the state where you live. Consult with your lender or use a break even refinance calculator at sites like dinkytown.com and bankrate.com. They can show you how long you'd have to stay in your home to recover all refinancing costs by having a lower monthly payment. For instance, if your closing costs are $3,000 and the deal will save you $300 per month, you'll recoup your costs and break even after 10 months. If you're sure you'll own the home for at least a year, then you should probably refinance. However, one situation where it may not pay to refinance is if you've had your current fixed rate mortgage for a long time. By refinancing, you restart the amortization process late in your mortgage. This means most of your new payment will be comprised of interest and not paying down the outstanding balance. So in addition to considering the break even point of a refinance, consider the total amount of interest you'd have to pay if you refinance and if you don't. If you'd pay the same amount or less interest doing nothing, then it certainly isn't worth the trouble to refinance. What about the effect of rising interest rates on credit cards? Although most credit card rates are tied to an economic index, they've stayed relatively high for some time, even though other rates were low. Your credit score plays a big role in the rates you have to pay for consumer credit. So depending on the type of card you select, such as a low rate or rewards card, having excellent credit is the key to saving money on outstanding credit card balances. You can learn more about smart strategies to raise your credit score in a free video tutorial I created called the Credit Score Survival Kit. You can view it on my personal blog at smartmoves-to-grow-rich.com. Again, that's the Credit Score Survival Kit. You'll find it at smartmoves-to-grow-rich.com. Of course, you should pay off your credit cards each month to avoid all interest and fees. Also take advantage of 0% interest, balance transfer cards when it's right for your situation. I did a previous podcast called Should You Use a Balance Transfer Credit Card, which is episode number 146. It'll give you more information about how these offers work and what you need to consider. For more money tips and advice, be sure to follow me on Facebook, Twitter, and Google Plus. Also sign up for the free Money Girl newsletter. It has exclusive tips that you won't find in the podcast. You'll find links to everything I've mentioned and a transcript of this show on the Money Girl page at quickanddirtytips.com. Just look for episode number 327, called "How borrowers should handle rising interest rates." I'm glad you're listening to Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. Hey, I'm Yara Shaheedi, and I'm the host of The Optimist Project. This is the podcast that asks, "What gives you hope?" Each week, I sit down with changemakers you may or may not know from comedy, music, academia, and more to uncover what inspires them to create a better tomorrow. Join us as we find out ways that we can cultivate optimism in our own lives. You can find The Optimist Project wherever you get your podcasts. Don't forget to follow the show so you never miss an episode. [BLANK_AUDIO]