02
Jan

Can an Increase in Interest Rates be Good for You?

The Federal Reserve has recently announced that they will be increasing interest rates through 2018. This means that the interest rates that banks must pay to borrow money will increase, which leads to higher interest rates for consumers.

However, higher interest rates do have some benefits. This article will cover some of those benefits and what you can do to capitalize on those benefits.

Higher Returns on Savings

interest rates and couples

The main benefit of higher interest rates is a higher return on your savings. Low-interest rates mean that you will see practically no returns on your savings.

But the increased returns on savings accounts are not too high. You can expect a few percentage points increase, but this gain is still welcome compared to the practically non-existent returns of the past decade.

One way to benefit from higher returns is to shop for the best rates on your savings accounts and CDs. Most people do not even bother rate shopping anymore because the difference between a 0.45% return and a 0.3% return just does not make it worth it.

Banks Offer More Loans

The credit bubble in the early 2000s led to the financial crisis that rocked the world in 2008. Banks became much stricter in offering loans due to both regulations and a different risk strategy.

However, the banks are finally starting to offer more loans as the financial crisis becomes a distant memory. Plus, banks have much more incentive to loan money when the interest rate is higher.

A Stronger Dollar

A stronger dollar is another one of the benefits that come with higher interest rates. This is because higher interest rates tend to attract foreign investment from countries with low-interest rates. Foreign investment will make the dollar much stronger.

Now, it might be difficult to use this information to predict a swing on the foreign exchange market. Most of this information is already factored into the current exchange rate.

The main benefit of a stronger dollar is that it will be much cheaper to travel to Europe and Asia.

Property Value Increases

One of the more unusual benefits of increased interest rates is increased property values. Property value will increase because the interest rate on home loans will increase. More people that were considering buying a home will make the purchase to lock in low-interest rates when they still can.

More demand leads to higher property value. It also means more equity, which helps if you are underwater on your home loan.

This, obviously, is good for homeowners and bad for future homebuyers. Unfortunately, raising interest rates do eventually lead to a decrease in property values. Again, would-be homeowners will usually prefer renting than locking in a loan at 13% interest.

More Income for Retirees

As mentioned earlier, an increase in interest rates leads to a higher interest rate on savings accounts. This has the most impact on those living on a fixed income, which tends to be retirees. Even a small increase of a few percent makes those living on a fixed income happy.

As Baby Boomers begin to retire, the benefit of high-interest rates will be realized by more of the population. Again, increasing interest rates also mean that you should begin to rate shop. Rate shopping is especially important for retirees because of the importance of maximizing the return.

Stock Prices Will Become More Realistic

Most experts agree that the current stock market is massively overvalued. This is despite multiple days with massive losses.

The current stock bubble is caused by the low-interest rates, which just flood the stock market with money. More money means faster company growth and higher stock prices.

One of the benefits of the increasing interest rates is that these companies will begin to trade on actual fundamentals based on the reality of the company. Unfortunately, this means that many companies with bad fundamentals that are propped up by cheap money may simply vanish.

The benefit is that many of these good companies with strong fundamentals will still see a decrease in stock price. In other words, increasing interest rates will make it a great time to purchase excellent companies at a steep discount.

Final Thoughts on Higher Interest Rates

Hopefully, this list showed you that higher interest rates are not that bad. In fact, they actually signal a powerful economy.

The Federal Reserve would not raise interest rates during a weak economy. It would have no positive benefit. Businesses and consumers already have a weak incentive to take out loans, and higher interest rates will certainly not help.

As for the consumer side, higher interest rates are generally good for everyone except future homebuyers and those that carry a balance on their credit card. However, those living on a fixed income, Americans that live or travel abroad, and those that keep a large amount of money in savings accounts will all benefit from increased interest rates.

Unfortunately, most Americans have forgotten what living in an economy with high-interest rates feel like, and this means that most Americans do not even check the interest rate on any of their savings accounts or CDs.

high interest rate

This is a mistake. We could see interest rates that make rate shopping worth it as the current environment of sub-1% interest rates will likely disappear in the coming years.

All in all, make sure to stay on the lookout for rising interest rates with different lending providers and saving accounts. This means examining any potential interest rate increases and rate shopping.

Homeowners and would-be homeowners have their own set of issues. If you are a homeowner, then you should consider selling before interest rates get too high. If you are a would-be homeowner, then securing a mortgage before the interest rate increases should be a bigger priority.

Refinancing is still an option in the unlikely event that interest rates decrease. An increase, however, will leave you with fewer options.

 

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