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How Rising Interest Rates May Impact Which Loan Is Right for You

Man sitting on couch with calculator and data determining how rising interest rates may impact which loan is right

One likely result of a growing economy is that interest rates increase on loans and revolving credit. This is the byproduct of the nation’s central bank, the Federal Reserve, increasing the rate it charges banks to reduce the risk of excessive inflation. In fact in June 2018, after a long period of maintaining low rates, the Federal Reserve made its second rate hike of the year, and are expected to make up to five more increases by the end of 2019.

What this means for you

For consumers such increases can mean higher interest rates on their existing variable rate debt like credit cards, student loans, HELOCs and adjustable-rate mortgages. It may be a good time to consider consolidating higher interest variable rate debt into a fixed rate loan options such as home equity installment loans, while the rates are still low. In particular homeowners with higher rates, whether they have variable or fixed rates, could receive monthly payments savings with a home equity loan.

Applying for a low interest fixed rate home equity installment loan, before the Federal Reserve raises rates again, may save you money and accelerate your debt consolidation and reduction goals. Part of the appeal here is that a home equity loan's fixed APR is typically lower than interest rates on personal loans, credit cards, or other lending products. Since you must secure a home equity loan with your home as collateral, it may cost you less to borrow the money you need. However, you also put your home at risk if you are unable to pay back the loan, so be sure to consider the pros and cons and all your borrowing options.

“If you can borrow at a low rate to pay off all your higher interest debt with one monthly payment, you're putting more money toward principal. That helps you pay your debt much faster," says Michael Foguth, a financial advisor and President of the Foguth Financial Group in Brighton, MI.

A fixed home equity installment loan offers a locked-in interest rate and a fixed payment for the life of the loan. You won’t have to worry about monitoring rate fluctuations as you would with a variable rate account such as a credit card or a home equity line of credit (HELOC). Those products typically have variable interest rates that move as the prime rates change. Also, with a fixed rate loan, your monthly payment covers both principal and interest, so the loan will be paid in full within the original terms. You will have stability in your monthly payment and can budget accordingly.

Timing is important

Interest rates overall are still at fairly low levels, but they've started to climb in the past 12 to 18 months, according to CPA Sean Stein-Smith, a member of the National CPA Financial Literacy Commission.

Specifically, researchers from the CoreLogic Home Price Index Forecast expect mortgage rates to rise by about 0.82 percent between January 2018 and January 2019. These increases also impact home equity lending. For this reason, homeowners considering debt consolidation with a home equity loan may want to act sooner rather than later, to avoid further rate hikes.

For those who take out home equity loans, Smith offers some helpful advisory: “You aren't eliminating your debt; you're just moving it. Be proactive and create a plan to pay it down."

Getting started on a debt consolidation plan

Interested in learning more about fixed-rate home equity loans? Start with Discover’s home equity loan calculator to get a rate and monthly payment estimate. Also, be sure to consider the pros and cons of home equity loans. Depending upon the lender's policies and other conditions, you can generally borrow between $35,000 and $200,000, as long as your combined loan-to-value (CLTV) remains below 90 percent with a home equity loan. Your CLTV is your home equity loan amount plus your existing mortgage divided by your home’s value. Speak with your financial advisor or accountant to get a better sense for what’s right for your personal situation. If you’re interested in applying for a home equity loan, Discover makes it easy to get started. You can get prequalified in minutes online here.

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