A reader wonders if she’ll save money by getting a new mortgage, auto loan, and credit cards. Or will she actually pay more?
I keep hearing the Federal Reserve will raise interest rates in March. But I can’t find out how much that will be. Depending on the amount, should I rush out to refinance my 4 percent mortgage right away?
What about the loan on my car? That’s three years old. And my credit cards – should I switch to cards that are immune to the coming rate hikes? I’ve scoured the Internet, but I can’t find simple answers to these questions. Help!
– Sydney in California
Howard Dvorkin, CPA responds…
There are good reasons you can’t get straight answers, Sydney.
For starters, no one knows how much rates will rise in March. Maybe not even the Fed itself. This independent agency – neither Congress nor the President can boss it around – is very good at keeping secrets. While Fed chair Jerome Powell gets all the headlines, it’s a committee of 12 people who vote on rate hikes.
Whatever they decide, you need to know this: Those dozen people don’t raise your interest rates. They control something called the “federal funds rate.” That’s the interest rate that banks charge each other for short-term loans. Of course, like any other business with rising costs, those banks will pass those rate hikes onto you.
Within that boring explanation is the answer to all your questions, Sydney…
Should you refinance your mortgage?
No, you shouldn’t refinance your house just because you’re worried about a rate hike. You already have an excellent rate – the average for a 30-year fixed mortgage at this moment is 3.56. If you go chasing that extra fraction of a percent, you’ll probably spend more than you’ll save.
Closing costs traditionally add 3 to 6 percent to the price of a home. If your mortgage is $200,000, that’s an extra $6,000 to $12,000. Will you come out ahead? Use Debt.com’s mortgage calculator to find out. However, I generally advise against chasing lower rates. Even if you save a little, it’s time you could focus on saving more elsewhere.
Should you refinance your auto loan?
This is a big maybe.
While a car loan doesn’t come with closing costs (thank God!), you might face a “prepayment penalty” for paying off your loan early. Not every lender does this, so check the fine print on your contract. Also, check to see if the new lender charges an “application fee.” These are becoming rarer these days, but they still exist.
Finally, check with your state, because it might charge hefty fees for transferring the title and re-registering the car. Just like with your mortgage, you need to do the math to see if you truly come out ahead.
Should you get credit cards that are immune to rate hikes?
Before you chase new cards for lower interest rates, try paying down your steep balances that are sapping your hard-earned money. If you pay off your cards in full each month, then you never need to worry about rate hikes.
Obviously, many people can’t do that. A recent Debt.com survey found that “35 percent of Americans always carry credit card debt month-to-month.” So yes, you want to find cards with lower interest rates – but that’s something you should be doing anyway.
Rates hikes or no, I always recommend periodically checking in with your creditors to talk about your rates. There’s a good chance that they’ll give you a lower rate if you just ask the right way, at the right time.
Rate hikes are not a conspiracy
It’s usually around this point when I hear from Twitter, Facebook, or the comments section: “Howard, the Fed is one big scam!” The conspiracy theories cross the political spectrum, from liberal (rich elites keeping minorities in check) to conservative (it’s controlled by the Illuminati).
Last year, I even responded to one of these conspiracies – that the Fed is intentionally trying to ruin our economy.
Trust me, the Fed receives plenty of legitimate criticism. It doesn’t need conspiracy theories.
How to really not worry about rate hikes
People who have no debt have no fear of rate hikes. Sydney, I urge you to look at your finances holistically. If you don’t have a household budget, here’s how to create one. If you’re staggering under massive debt, here’s how to get out from under it.
Debt-free living is stress-free living. If you don’t think it’s possible, you can call Debt.com at (800) 210-9842 and speak with a trained counselor who will give you a free debt analysis – and help you achieve financial freedom. Then the next time you hear about a Fed rate hike, you can just smile and forget about it.
Published by Debt.com, LLC