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<p>To <a href="https://www.timesleader.com/wire/national-wire/544248/federal-reserve-june-interest-rate-hike-likely-if-economy-keeps-improving" target="_blank">no one&#8217;s surprise</a>, the Federal Reserve announced a one quarter percent increase in the Federal Funds rate at its <a href="http://www.wsj.com/livecoverage/federal-reserve-december-meeting" target="_blank">December 2016 meeting</a>. It was the first rate increase since last December and the second in ten years. The Fed has indicated that it foresees three more rate increases in the coming year. The rate has been kept artificially low for that time as a means to keep borrowing costs low so more consumers and companies would spend money and boost the economy. Now that they are on the uptick again, you may be wondering how rising interest rates could impact your finances in the coming year. First, it would be important to understand why interest rates are rising and what to expect as far as future increases.</p><p><strong>What is Making Interest Rates Rise?</strong></p><p>Normally, the Fed increases short-term rates at the first signs of an expanding economy or higher inflation. Many monetary experts view last year&#8217;s increase as premature because the economy wasn&#8217;t doing as well as expected and <a href="http://www.reuters.com/article/us-usa-economy-jobless-idUSKBN1441O7" target="_blank">inflation was still hovering</a> way below one percent. But, the Fed increased the rate anyway because it has wanted to do so for a while after keeping a lid on them for so long.</p><p>As a result, the increase by the Fed didn&#8217;t have a material effect on the market or on other interest rates. Soon after the rate increase, the stock market tanked in response to big concerns over China&#8217;s economy, which was seen as a threat to the global economy. The Fed, which had promised more rate increases throughout 2016, kept postponing them over concerns of a weakening economy. Consumer interest rates and bond yields never increased in response to the Fed rate increase. In fact, they continued to fall due to slow economic growth.</p><p>This time around things are different. In the last quarter of 2016, the economy is finally showing signs of strength and, with the election of Donald Trump, businesses are optimistic over their growth opportunities. Following the election, the stock market soared to record highs and bond yields took their first big fall. Inflation is beginning to stir much more than it has in a while. All of these are indicators that can put upward pressure on interest rates &#8211; both short-term and long-term.</p><p>As last year has shown, a one quarter percent increase in the Fed Funds rate is not likely to have a material effect on interest rates in general. But, a resurgent economy and higher inflation will. So, consumers can expect some impact on their personal finances in the coming years. Generally, if you are a saver, you could benefit from higher rates, but, if you are a debtor, you could be paying more in interest in 2017.</p><p><strong>Mortgage Rates</strong></p><p><a href="https://www.zillow.com/mortgage-rates/" target="_blank">Mortgage rates began increasing</a> even before the election, rising from a low of 3.4% on a 30-year fixed loan to just over 4.0%. Mortgage rates are more directly tied to the yields on Treasury bonds, which have also been increasing. If the economy continues to grow, you could see Treasury yields and mortgage rates continue to increase.</p><p>If you are a fixed mortgage holder, you won&#8217;t be affected unless you have been planning on refinancing your loan. Now would be the time to do so. If you own an adjustable rate mortgage, you should also consider locking in today&#8217;s rates because no one can be certain how high interest rates will climb.</p><p><strong>Consumer and Student Loans</strong></p><p>The only types of debt that are impacted by higher interest rates are variable rate loans or credit cards with variable APRs. You can expect those rates to creep up throughout the year. Most variable rate loans adjust just once a year, but credit card APRs can be ratcheted up at any time. If you have credit card debt, you should consider paying it down more quickly. If you have an opportunity for a zero interest balance transfer to another card for 12 months or longer, now would be a good time to accept the offer.</p><p>Federal student loans are fixed, so they will not be affected. However, Congress <a href="https://studentaid.ed.gov/sa/types/loans/interest-rates" target="_blank">sets federal student loan rates</a> once each year, and the rate increase will eventually be priced in. Also, about 10% of students loans are private loans. Private student loans can have both variable and fixed rates. Borrowers with variable rate loans will see their rates increase. If you currently have a variable rate loan, it might make sense to <a href="https://lendedu.com/blog/refinance-student-loans/" target="_blank">refinance student debt</a> to a fixed rate. There are multiple companies who offer fixed rate student loan consolidation with terms ranging from 5 to 20 years. As a rule of thumb, fixed rates start 200 basis points higher than variable rates. You should know which type of student loans you have and look for opportunities to refinance or consolidate.</p><p><strong>Deposit Accounts</strong></p><p>The <a href="https://www.timesleader.com/opinion/editorials/499013/our-opinion-appeal-of-saving-will-return-as-interest-rates-slowly-rise-but-why-wait-use-tips-to-save-now" target="_blank">bright side of rising interest rate</a>s is that your <a href="http://www.timesunion.com/tuplus-business/article/Low-rates-mean-low-return-on-savings-10803339.php" target="_blank">savings account balance should grow</a> a little faster. However, don&#8217;t expect your rate on savings to jump very far. When interest rates rise, banks can raise rates on deposits, especially if they want to attract more deposits. But most of the big banks are already flush with cash, so they may not need to raise their rates. Because their margins have been under pressure for so long due to low borrowing rates, they may not be in hurry to increase rates on deposits. You can expect your savings account rate to lag behind general interest rate increases for a while.</p><p><strong>Investments</strong></p><p>If you own any bonds, you can expect to see their value decrease as yields increase. That shouldn&#8217;t be a problem if you plan to hold the bonds to maturity. You will continue to receive the fixed interest that comes with the bond and will mature at 100% of its face value. If you hold a bond fund, you may see a decrease in share value, but, as the fund manager sells older bonds and buys newer, higher yielding bonds, you will receive a higher yield on your investment.</p><p>Stocks and stock funds should perform well if the interest rates are rising as a result of a growing economy. If inflation picks up too much, it could have a dampening effect on some stocks. If rates increase too far, the cost of borrowing increases which keeps companies from growing.</p><p>The key in investing is to keep your portfolio diversified, holding different assets that move differently from one another. No one can predict the movement of interest rates or the stock market, so the best strategy is to stay allocated among many different types of investments.</p><style>
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<div class="metaInfo"><bylineMeta><p>By Andy Rombach</p><p>LendEDU</p></bylineMeta></div>

How rising interest rates could impact your finances in 2017