Examining Your Finances As Interest Rates Climb Viewing page 1 of 2   Next >

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Often, consumers can find such information easily and conveniently at their neighborhood banking center. Here are some options the company suggests that customers consider as they manage expenses and debt in a changing rate environment:

* Consolidate debts: In a time of rising interest rates, many consumers can significantly cut monthly interest rate payments by consolidating high interest debts. Home equity lines of credit (HELOCs) are great options for customers who want flexible financing options with low interest rates. In addition, the interest paid on HELOCs is often tax deductible. Check with your tax accountant to see what rules apply.

* Increase Yields while maintaining liquidity: In any changing rate environment, savings vehicles such as Certificates of Deposits (CDs) provide the security of FDIC insurance along with higher rates than traditional money market accounts. Institutions such as Bank of America provide advice to help customers maximize their potential returns by “laddering” their CD investments.

“Laddering means investing equal amounts in several CDs with staggered maturity dates, rather than putting the full amount in one CD,” explains Beverly Ladley, Savings & Investment Products executive for Bank of America. “For example, instead of putting $30,000 in one nine-month CD, you can put $10,000 in three CDs that mature at different intervals. The shorter-term CD is available sooner, but the longer-term CDs enjoy generally higher yields, so the overall blended return is stronger. It’s a great way to make your CDs work harder than ever for you.”

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Differences in Rates

The Federal Reserve’s recent increase does not necessarily directly impact home mortgage rates, which tend to correlate closer with 10-year Treasuries. Gene Morris, Senior Vice President in Consumer Real Estate with Bank of America, says that continued mixed economic indicators and a clouded job market have actually driven mortgage rates down, although he cautions that window will likely be short and mortgage rates are expected to rise throughout the year. The average for a 30-year fixed-rate loan dropped from 6.49 percent in May to as low as of 6 percent in July, says Morris.

“Despite all the attention given to rising rates, homebuyers and homeowners still have great opportunities to refinance or to trade up to new homes,” says Morris. “It’s an unexpected window of opportunity for them.”

How much house can you buy?

If you want to buy a home while mortgage rates remain low, consider your income and your debt load. Typically, lenders encourage you to spend no more than around 30 percent of your income on a mortgage. If your gross income is $4,000 per month, that would equate to about $1,200 per month in mortgage payments.

Before you borrow, ensure that you can handle payments in unanticipated circumstances. For example, Bank of America offers Borrowers’ Protection Plan, which covers mortgage payments in the event of unemployment. However, even with risk protections, customers should ensure that monthly payments fall within their budget and that they have adequate savings to cover unexpected events.

Today’s homebuyer can find a greater range of mortgage options than ever. For example, if you plan to own the house for 5 years or less, you may prefer the lower initial monthly payments of an adjustable rate mortgage, in which you can choose up to a seven-year ARM. This means payments remain constant for up to seven years, then can change annually.