May 3, 2021
There are both “pros and cons” to rising interest rates. One of the biggest “pros” to higher interest rates are the higher savings returns that can be earned in a savings account.
Conversely, when interest rates are rising, business and consumers cut back on spending as increases in prices on goods resulting in lower consumption. This would fall into the “con” category. Let’s take a closer look at a few more “pros and cons” resulting from rising interest rates as well as some smart moves to make while rates still near historic lows.
To help battle high inflation in 1981, the Fed raised interest rates to an astronomical 19%. The move was ultimately successful. However, in the interim, those with savings accounts that year saw savings returns far greater than most investments in the stock market. That year the Dow Jones Industrial Average lost 9.23% for the year. In addition to higher savings returns for savers, individuals living on retirement income also benefit from rising interest rates. Rising rates also result in a stronger U.S. dollar since higher interest rates tend to attract increased foreign investment.
As the economy begins to recover from the steep recession spurred by COVID, higher interest rates are likely. This is because an improving economy causes interest rates to increase by increasing the demand for money, as well as increase the cost of borrowing due to higher credit card rates. From a home buyer's perspective, some “cons” of higher interest rates are that they lower the demand for housing and make buying or selling a home more difficult. This is because when mortgage rates increase, affordability decreases. One reason for this is that the lower cost of houses is offset by the costs associated with higher mortgage rates.
As observed in data from Freddie Mac, even a 5% mortgage rate is historically very low. Furthermore, right now mortgage rates are still considerably cheaper than 5%. Freddie Mac adds that with 30-year fixed mortgage rates currently under 3%, there is currently a tremendous opportunity to secure a tremendous rate. “The drop in mortgage rates is good news for homeowners who are still looking to take advantage of the very low-rate environment.”
Current homeowners should also consider taking advantage of today’s ultra-low mortgage rates, particularly if they are being weighed down by credit card debt or need some cash. The reason for this is that over time your home builds value known as equity. A cash-out refinance is a way to access that equity to pay off higher-interest debt, pay for a wedding, make home improvements, or even focus on retirement. In this cash-generating scenario, you refinance your existing mortgage into a new one for a larger amount and pocket the difference, less any closing costs.
Although you could potentially save thousands in the long run, keep in mind that with this option you will be taking on a new loan with new terms which could extend the length of your mortgage. However, the flexibility of a cash-out refinance’s lump sum lets you choose how you want to utilize your money.
Since we have been discussing “pros and cons”, one of the biggest “pros” to today’s low-interest rates is being able to lock in a historically low rate. Depending on the details of your refinance, decreasing your rate even slightly could substantially lower your monthly payment. Another way to take advantage of today’s low rates is by shortening your loan term through refinancing from a 30-year to a 15-year fixed-rate mortgage. This move makes sense if you want to take advantage of the current low-rate environment to pay off your mortgage quicker. The idea is to use today’s lower rates to help offset the increase in your monthly payment amount. These are each great benefits of doing a refi while rates are still near historic lows
Trying to predict future mortgage rates is not easy to do. Despite the “pros” of higher interest rates, many current and soon-to-be homeowners are choosing not to chance the possibility of rising rates by taking advantage of today’s truly historic low rates.