Should you be worried about interest rates going up? It’s complicated

Money

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The Federal Reserve will likely raise interest rates in 2022 in response to rising inflation.

A majority of the members of the Fed’s Open Market Committee, which sets monetary policy for the country, say they expect the federal funds rate to rise to 0.875% this year, after sitting at close to 0 since the onset of the COVID-19 pandemic.

Many interest rates are based on the federal funds rate, so you can expect the Fed’s actions to reverberate throughout your financial life. Here’s how higher interest rates will affect you.

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1. Variable rate loans

Higher interest rates are good for savers and bad for borrowers. Variable-rate loans like credit cards and home equity lines of credit follow the federal funds rate closely, so you can expect to face higher costs on these loans quickly if the Fed raises rates.

“I would recommend paying down these types of debt before rates start increasing,” says Chris Diodato, certified financial planner and founder of Wellth Financial Planning.

Related: Read our list of 50 ways to pay off debt

2. Savings yields

On the other hand, higher interest rates will be good for savers. If you’ve been disappointed with your so-called high-yield savings account, you can expect a higher return from your savings after years of anemic interest rates. Financial products like bonds and the cash value component of a whole life insurance policy will also see higher returns as rates rise.

3. Mortgages

The federal funds rate also impacts long-term loans like mortgages, although the housing market and overall economy also affect mortgage rates. These rates have started to creep up over the past year, and they should continue to rise along with other interest rates in 2022.

Does that mean you need to rush to buy a house before rates climb further? Ryan Sterling, certified financial planner and founder of Future You Wealth cautioned against this.

“One thing that very well could happen is yes, while rates may make your payment go up, what you should also potentially see is prices come down,” Sterling says.

Plus, he adds, while mortgage rates are climbing, they are still historically low, even compared to their 2018 peak.

4. Inflation

One of the Federal Reserve’s responsibilities is to keep prices stable. It raises interest rates to control inflation.

The Consumer Price Index, a federal measure of inflation, has increased almost 7% year over year, which means you’re paying higher prices for things like cars and groceries. When the Fed raises interest rates, it makes borrowing to buy things more expensive. This lowers demand for products, which should (if you are wearing your macroeconomics 101 hat), lower prices.

In practice, this is a delicate balancing act.

“The Federal Reserve needs to take special care to raise rates enough to calm down inflation, but not so much that it shrinks overall demand so much that it causes an economic slowdown,” Diodato says.

5. Investments

Low interest rates have helped fuel some of the weird personal finance developments of recent years. They’ve led investors to seek higher yields in some strange places, like meme stocks and cryptocurrencies.

With higher rates constraining the amount of money investors can borrow, Sterling believes we could see a return to more normal, boring investing strategies.

“As the Federal Reserve takes away that stimulus, I think that’s going to be a headwind for markets, but I think the tailwind is that solid companies, for the most part, are in really good shape,” Sterling says.

Sterling doesn’t expect to deviate much from the investing strategies he’s already created for his clients, even if the market’s initial reaction to rate increases is negative.

“If you have a plan in place, the Federal Reserve going through three to four interest rate increases next year should not have a material impact on your plan,” Sterling says.

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originally appeared on 
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The US city that Boomer homebuyers are flocking to

 

Baby boomers are the wealthiest generation of Americans alive today, according to the latest Federal Reserve data, and plenty are still looking to buy homes.

But where are baby boomers looking to buy? To answer this question, LendingTree analyzed mortgage purchase requests made in 2020 on the LendingTree platform across the nation’s 50 largest metropolitan areas (metros).

What LendingTree found was that baby boomers (defined as anyone born between 1946 and 1964) make up a significant portion of potential homebuyers in many of the country’s largest metros.

 

gabrieleckert / istockphoto

 

LendingTree used generational definitions, from the Pew Research Center, to define the age range for baby boomers as being born between 1946 and 1964.

Metropolitan statistical area (MSA) rankings were generated by looking at the percentage of total purchase mortgage requests received by LendingTree from baby-boomer borrowers. The larger the share of requests from baby boomers, the higher ranking a metro area received.

Borrower data was derived from mortgage requests and offers given to users of the LendingTree mortgage shopping platform across the nation’s 50 largest metropolitan areas from Jan. 1, 2020, to Dec. 31, 2020.

 

bernardbodo / istockphoto

 

In general, baby boomers tend to have stronger financial profiles than those of younger generations, but that doesn’t mean that they don’t need to carefully plan before buying a home.

Here are some tips for baby boomers looking to buy a home:

  • Consider how it will impact your retirement. If you’re thinking about buying a house while you’re nearing or at retirement age, you’ll want to carefully consider how costs associated with that house will impact you when you’re no longer working. For example, if you pay with cash, ask yourself if you will be able to afford property taxes or other annual fees. If you decide to take out a loan, consider whether or not you’ll be able to make your monthly payments.
  • Look into different loan programs. There are many different loan programs that could be beneficial to you depending on your financial profile. For example, if you’re an older baby boomer you might be able to qualify for a retirement mortgage, which can help you get around income requirements that you’re likely to find with other loans.
  • Pay down your monthly debts. If you decide to purchase a home with a loan, lenders look carefully at your debt-to-income (DTI) ratio, the percentage of your gross monthly income that goes toward recurring debts. Maximum DTI ratios vary by loan program, however, so it’s a good idea to keep your total DTI ratio (which includes your monthly mortgage and all debt payments) at 43% or less. Even if you plan on paying with cash, it’s a good idea to pay off as much debt as you can so you have extra money for housing-related costs.

 

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1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

:Ivan Nadaski / iStock

 

  • Share of mortgage requests coming from baby boomers: 10.28%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 677
  • Average down payment amount among baby boomers: $45,644
  • Average requested loan amount among baby boomers: $224,083

 

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  • Share of mortgage requests coming from baby boomers: 10.38%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 689
  • Average down payment amount among baby boomers: $57,105
  • Average requested loan amount among baby boomers: $260,750

 

istockphoto/Vito Palmisano

 

  • Share of mortgage requests coming from baby boomers: 10.49%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 693
  • Average down payment amount among baby boomers: $97,495
  • Average requested loan amount among baby boomers: $423,968

 

istockphoto/shalunts

 

  • Share of mortgage requests coming from baby boomers: 10.60%
  • Average baby boomer age: 61.8
  • Average credit score among baby boomers: 685
  • Average down payment amount among baby boomers: $44,823
  • Average requested loan amount among baby boomers: $225,762

 

istockphoto/Mark Howard

 

  • Share of mortgage requests coming from baby boomers: 10.65%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 682
  • Average down payment amount among baby boomers: $34,531
  • Average requested loan amount among baby boomers: $173,498

 

 

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  • Share of mortgage requests coming from baby boomers: 10.67%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 667
  • Average down payment amount among baby boomers: $39,789
  • Average requested loan amount among baby boomers: $214,220

 

gabrieleckert / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 10.84%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 674
  • Average down payment amount among baby boomers: $42,830
  • Average requested loan amount among baby boomers: $217.053

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 10.89%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 692
  • Average down payment amount among baby boomers: $58,762
  • Average requested loan amount among baby boomers: $282,576

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 10.92%
  • Average baby boomer age: 61.6
  • Average credit score among baby boomers: 662
  • Average down payment amount among baby boomers: $30,158
  • Average requested loan amount among baby boomers: $192,342

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 10.96%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 681
  • Average down payment amount among baby boomers: $41,749
  • Average requested loan amount among baby boomers: $209,718

 

istockphoto/Sean Pavone

 

  • Share of mortgage requests coming from baby boomers: 11.62%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 666
  • Average down payment amount among baby boomers: $34,208
  • Average requested loan amount among baby boomers: $180,679

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 11.63%
  • Average baby boomer age: 61.9
  • Average credit score among baby boomers: 671
  • Average down payment amount among baby boomers: $44,295
  • Average requested loan amount among baby boomers: $247,038

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 11.70%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 674
  • Average down payment amount among baby boomers: $40,399
  • Average requested loan amount among baby boomers: $213,417

 

DepositPhotos

 

  • Share of mortgage requests coming from baby boomers: 11.97%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 694
  • Average down payment amount among baby boomers: $48,934
  • Average requested loan amount among baby boomers: $239,478

 

SeanPavonePhoto/istockphoto

 

  • Share of mortgage requests coming from baby boomers: 12.12%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 676
  • Average down payment amount among baby boomers: $41,479
  • Average requested loan amount among baby boomers: $204,111

 

Sean Pavone / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 12.46%
  • Average baby boomer age: 62.4
  • Average credit score among baby boomers: 685
  • Average down payment amount among baby boomers: $59,287
  • Average requested loan amount among baby boomers: $285,923

 

istockphoto/Chris LaBasco

 

  • Share of mortgage requests coming from baby boomers: 13.19%
  • Average baby boomer age: 61.9
  • Average credit score among baby boomers: 665
  • Average down payment amount among baby boomers: $38,683
  • Average requested loan amount among baby boomers: $226,908

 

eurobanks/ istockphoto

 

  • Share of mortgage requests coming from baby boomers: 13.20%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 702
  • Average down payment amount among baby boomers:  $91,017
  • Average requested loan amount among baby boomers: 4409,620

 

istockphoto / Jerry Uomala

 

  • Share of mortgage requests coming from baby boomers: 13.27%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 684
  • Average down payment amount among baby boomers: $43,025
  • Average requested loan amount among baby boomers: $218,010

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 13.73%
  • Average baby boomer age: 62.7
  • Average credit score among baby boomers: 683
  • Average down payment amount among baby boomers: $53,586
  • Average requested loan amount among baby boomers: $276,202

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 13.95%
  • Average baby boomer age: 62.8
  • Average credit score among baby boomers: 687
  • Average down payment amount among baby boomers: $46,364
  • Average requested loan amount among baby boomers: $219,520

 

Philip Rozenski / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 15.26%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 697
  • Average down payment amount among baby boomers: $63,759
  • Average requested loan amount among baby boomers: $269,351

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 16.36%
  • Average baby boomer age: 63.2
  • Average credit score among baby boomers: 693
  • Average down payment amount among baby boomers:  $54,342
  • Average requested loan amount among baby boomers: $264,800

 

istockphoto/Sean Pavone

 

  • Share of mortgage requests coming from baby boomers: 17.33%
  • Average baby boomer age: 62.9
  • Average credit score among baby boomers: 690
  • Average down payment amount among baby boomers: $41,341
  • Average requested loan amount among baby boomers: $196,524

 

Gabriele Maltinti / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 19.97%
  • Average baby boomer age: 63.2
  • Average credit score among baby boomers: 681
  • Average down payment amount among baby boomers: $52,262
  • Average requested loan amount among baby boomers: $263,256

LendingTree senior research analyst Jacob Channel contributed to this report.

This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.

 

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felixmizioznikov / istockphoto

 

Featured Image Credit: Photodjo / iStock.

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Myles Ma

Myles Ma is an editor at PolicyGenius.com.