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How To Prepare For Rising Interest Rates

Saturday, August 31, 2013 - 7:53 AM
"We do anticipate rates going up, but how far and how fast that's going to happen is an open question," says Bradley Roth, managing partner at Kattan Ferretti Financial, a Pittsburgh-based financial planning and investment advisory firm. He expects the rates on 10-year Treasurys, which are currently approaching 3 percent, to reach 3.25 percent before the end of the year and then 4 to 4.25 percent in 2014.

How to Prepare for Rising Interest Rates - DailyFinance
8
ShorebreakShorebreak2,379 posts since
Apr 6, 2010
Rep Points: 12,704
1. Saturday, August 31, 2013 - 10:35 AM
Great article, I would recommend that everybody read it at least twice the itemized reminders.

For borrowers, I will add:

Be careful about HELOC, get ready to apy it off should the rate become much higher.  My current rate is 2.24% APY so I am accustomed to get money from HELOC for a temporary low-rate loan.  Once it is above 3%, I would pay it off and not touch it at all.  My home morgage is at (2.625%, $200K, fixed-rate for 10-year); this is a nice one for the long term.

For investors, I would add:

Be very careful to shift bond fund to equity fund, it will be like catching a falling knife (a brutal financial jargon).  I would park most of my money in stable value fund (at 3% APY typically) and take a wait-and-see attitude.  There are simply too many unknowns at this climate and  "Cash is always king" in this risky enviorment.  Cash also gives you restful sleep at night. 

For savers, I would add:

Put some, if not most, of the fund in RCAs (which averages 2.5% and 3% - 4% with some effort), which is agile and flexible for any interest rate movements.  

Just my two-cents without retribution.
5
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
2. Saturday, August 31, 2013 - 9:34 PM
Excellent article Shorebreak, thanks for posting; I second 51hh's
recommendation. Especially liked the advice to savers:

     ". . .the most important point is getting in the habit of saving, and
      saving as much as possible . . . That's much more  important than
      the interest rate you are earning on your short-term accounts . . ."
4
cumuluscumulus297 posts since
Jan 16, 2010
Rep Points: 1,374
3. Sunday, September 1, 2013 - 7:56 AM
To #2 Saving is important (especially a large emergency fund) but remember that purchasing is over 70% of our GDP. Wiithout spending or a lot of exports there are no jobs. 

We bought a new house, furniture, appliances and car in the last 2-3 years.  We needed a house that was one story because of my husband's health, replaced furniture was 40 years old and appliances that were over 20 years old and a car that was 14 years old. You save in the good times when saving rates are higher and spend when times are bad. That has been our way of thinking for the last 50 years and this was our contribution to the local economy during the "GREAT RECESSION." 

Even when we were very young we saved after buying our school clothes. I helped with a paper route and babysat starting at 8 years old. Could not do that today. At 15 I worked at a dime store and a grocery store 25 hours a week until I graduated and married at 18 and we had 35% downpayment on our first home and a new car paid for. Had old hand me down furniture until we could pay cash for new furniture. 

It was my husband's way of thinking also that you get better deals when times are tough and get more on your savings when times are good. 
3
AllyAlly785 posts since
Jan 16, 2010
Rep Points: 2,281
4. Sunday, September 1, 2013 - 4:02 PM
 
Similarly, if you're considering buying a home, try to speed up the process, Roth urges. "Don't drag your feet, because we'll see rates go up. You're not going to get a better opportunity to buy a house."

 

The closing paragraph only assumes the advantage to the borrower.  Is it possible that rising rates will affect housing prices to the downside?  For the saver, a cash home purchase may be better a couple of years from now.   For the borrower, this could be the next beginning of new homeowners who will be underwater (in their mortgage) in 7 years.  It is not a certainty that a home purchase now is building equity.

All of this is IF rates RISE  substantially.  

They might not, if the FED maintains control and the country needs them low.





 

 

 
2
MikeMike327 posts since
Feb 22, 2010
Rep Points: 875
5. Sunday, September 1, 2013 - 7:41 PM
Why do we seem to always have these 7 year cycles? When interest rates where high in the past home prices were low and visa versa. 
2
AllyAlly785 posts since
Jan 16, 2010
Rep Points: 2,281
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