Interest Rates Are Going Up. Now What?

by Jean Chatzky
Photograph: Illusration: Stephen Doyle

Let me predict a few things that will happen in the next year. Brad and Angelina will add another baby to their brood. The day you spend $175 getting your hair done is the day it will rain. And the variable-interest rates—on your savings account, mortgage and credit card—will go up.

OK, I admit it. That last one is a sucker’s bet. The fed funds rate—the rate at which banks lend money to one another and which is tied to every other interest rate—is about 0.20 percent. It has been there since December 16, 2008, and has nowhere to go but up. “I think the Fed will start tightening by the middle of 2011,” says Mark Zandi, chief economist at Moody’s, using insider-speak for the practice of raising interest rates. That means there’s a decent chance that today’s rates are the lowest you and I will see in our lifetime. Here’s how to take advantage of them.

If you have money in the bank

Most likely, your emergency funds are sitting in a money market account earning less than 1 percent. Don’t worry. It’s true that by comparison, five-year CDs—averaging a little under 3 percent—look like a decent deal. But when interest rates rise, if your money is stuck in a CD, you could see both rates and inflation go racing by. “Don’t lock up” your money, Zandi advises. “Some financial institutions are offering deals to get people into longer-term CDs, but I wouldn’t go out further than a year or two.”

If you want to invest in a CD, look for flexibility in the product you choose. At press time, Ally Bank ( has an 11-month CD at 1.35 percent that you can get out of at any point without penalty. ­It also offers a two-year CD at 1.95 percent that gives you one opportunity to up your rate if there’s an increase during your term.

If you want to buy a house

Now’s your chance! For one thing, prices are in the tank and are expected to continue falling through the end of the year. “The economy may not double-dip, but housing could,” says Mesirow Financial economist Diane Swonk.

Even if prices have already started climbing in your area (as they have in San Francisco and some cities in the Northeast), cheap mortgage money still makes this a great time to move. Every percentage point a mortgage rate falls is equal to a 10 percent drop in the price of a house. And as I write this, mortgage rates are lower than they’ve been in 50 years: an average of 4.62 percent on a 30-year fixed-rate loan and 3.68 percent on a five-year adjustable-rate mortgage.

If you own a home

At present, nearly 50 percent of people with 30-year fixed-rate mortgages have interest rates of 5.75 percent or higher. If rates are still below 5 percent and you plan to stay in your house longer than a few more years, refinancing may make sense. On a $300,000 mortgage, refinancing a loan at 5.75 percent into a 30-year loan at 4.8 percent means saving more than $63,000 in interest over the life of the loan.

And you may not even have to go through another closing. These days you’re used to hearing the term loan modification in relation to borrowers who are having trouble making their payments and are looking for a break. Historically, it means something else: a sort of streamlined refinancing process in which you pay several hundred dollars to your current lender to lower your rate. If your mortgage rate is anywhere in the 5.5 to 6 percent range or higher, call your lender and ask about the possibility of modifying your loan.

There are two other cases in which you should look into refinancing: (1) You have an adjustable-rate loan and plan to stay in your house. Now is your chance to lock in a mortgage with an interest rate that won’t escalate. ?(2) Your credit score has improved since you applied for your mortgage. A jump in your score from 630 to 730 would shave nearly 1½ points off your interest rate, according to

If you have a home-equity line of credit (heloc)

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