A recent MSN Money article about the possibility of rising interest rates had me thinking about the potential effects such a move might have. The article notes that, "Investors have been fretting for weeks about when the Federal Reserve might start to taper down their big bond purchases, and the assumption is that rates will move higher when that happens. High rates will knock down bond prices."
It goes on to say, "There's a larger fear afoot, however, about when the Fed will actually raise rates. The consensus is not until 2014 at the earliest."
Personally, I have no worries about rising interest rates, and I'm actually looking forward to them for several reasons.
I'm a big fan of low-risk investing. However, since the recession, finding such investment options with any sort of worthwhile return has been next to impossible.
While rates of 3 or 4 percent on certificates of deposit or high interest savings accounts aren't great, they're a heck of a lot better than current rates. And even a percent or two increase in rates could have a big impact upon an investment return over time.
In fact, by using simple financial calculators like the ones found at bankrate.com, we can see the difference in $50,000 invested at 3 percent and compounded annually over a 30 year period ($121,363.12) and 4 percent ($162,169.88) is $40,806.76, a substantial difference.
Low or no debt
Interest rates aren't a huge concern to those of us without debt. By paying off our credit card monthly, not having a mortgage, paying off our student loans, owning our vehicle outright, and otherwise remaining debt-free, we're able to avoid the negative consequences of rising interest rates.
Just as in my previous example of small interest rate adjustments earning us more money over time, we understand that the opposite can be true when it comes to debt. Small fluctuations in interest rates can add up to tens of thousands of dollars or more over time in debt payments. A great infographic on creditloan.com puts the average American's interest payments on debt at $600,000 over the course of a lifetime. This illustrates just how much can be spent -- or under the right circumstances, saved -- on debt, especially when interest rates are on the rise.
High home principal
Maybe one of the best known effects of rising interest rates is upon mortgages. As of the writing of this article, rates are still near their lowest points in decades but are threatening to go up. According to that infographic on creditloan.com that I mentioned earlier, "After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house."
As the housing market collapsed, we sold our home -- albeit at a loss -- took the equity, and downsized to a much smaller home. So down the road, if or when decide to move again, we can hopefully transfer the principal we have retained so that we can either buy our home again outright or at least lower the amount of the mortgage we must take on as well as the rate at which we undertake it, thereby negating the effects of rising interest rates on mortgages.
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The author is not a licensed financial or real estate professional. Calculations have not been verified by a professional. The information provided in this article is for informational purposes only and does not constitute legal, financial or real estate advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Financials Industry