With the economy continuing to strengthen, and the unemployment rate at multi-decades low, the Federal Reserve plans on at least 2 more short term interest rate increases this year and as many as 3 or 4 in 2019. What this means for Americans is that the cost of servicing their debt will continue to increase.
Short term interest rates, as set by the federal reserve, directly impact certain type of debt as well as loans. This includes credit cards, home equity as well as automobile loans. The fed prime rate does not directly impact mortgage 15 or 30-year rates, as those mostly follow the treasury market. However, the short-term interest rates can, and often do, influence mortgage rates over the long term.
What should you do in 2018?
As we have been reporting on, and advising for a while, there should be an even stronger focus on paying down debts. Focus on credit cards which will have an almost immediate increase in rates (and therefore your monthly payments) as the federal reserve increases interest rates. This is due to the variable rates charged. Most banks adjust their credit card interest rates within minutes of the federal reserve announcement.
If you have a home equity loan still outstanding in 2018, this should be the next priority. These rates are also usually impacted right away. The reason a credit card bill/debt should be paid first (over home equity) is that credit card payments are not deductible on your taxes while a home equity loan may be.
Auto loans will also become costlier through 2018. This will mostly impact new car buyers, as once you have an auto loan you are almost always locked into that interest rate for the term of the loan. Now there may be some exceptions to this, and those will mostly have to do with borrowers that have or had poor credit. In some cases, depending on the terms conditions of their loan, the interest rate may be variable.
As we noted, mortgage rates will not directly be impacted. However, they have been trending up to multi-year highs, and while no one knows what the future holds, many experts think mortgage rates will continue to increase. So if you are on the fence about buying a home, we advise to closely watch how the year unfolds and be prepared to act when the time comes.
The bottom line is that throughout 2018, and most likely in 2019 (according to most experts), interest rates will continue to go up. This will make any debt payments you have more expensive. Or if you were planning on using a loan in the future, then plan on it being a little costlier. With a strong economy and job market, now is a good time to pay down some debts.