June is quickly approaching and so is the next chance for the Fed to raise interest rates. Considering that she has already increased the rates twice in the last 12 months and the economic effects were negligible my bet is on another increase. Probably similar to that of the previous two which were one quarter of a point. Doesn’t seem like much but it can have a significant impact on your wallet? As a specialist in Emergency Medicine it is important to understand how these increases will affect your bottom line and what you can do about it.
Most of you are not old enough to remember what the interest rates where in the 1980’s and but get ready for a shocker. The average home loan was 18.5% for a fixed 30 year mortgage. No one really wanted adjustable rates because the market was increasing and that would have spelled disaster for most. Looking ahead to the present, rates have been at historical lows. This has made it attractive to buyers and those looking to refinance. The home they never thought they could afford has become affordable and the home they already own has become less expensive to live in. Now that are increasing and look to do so at least twice more this year we have a little problem. What’s that you say well lets take a look at the math. When the Federal Reserve raises the interest rate by 1% over a year do you know how this affects your adjustable rate? Let’s assume you have a monthly payment of $1000 on a 3% ARM. When that 1% increase kicks in your monthly payment will go up by 33% or approx. $330 per month. Which is to say that 1% = 33%). How is that possible you ask? The increase was only 1%. Yes, but if we add 1% to the current interest rate of 3% we have actually added 33.33 % to your monthly expenses. Because 1% is actually 33.33%. I am no mathematician but that is a significant increase and can affect your financial situation and add stress to your wallet if you can’t cover it. Remember historically interest rates are approximately 7%.
I know we preach this a lot but it is so very true and appropriate to this topic. Living today is fine but always be prepared for tomorrow, it does come. In short if your bank approves a loan for more than what you dreamed of just remember if it’s on an ARM you better be able to pay for it when the increase comes. We work with clients daily to help them make financial decisions that will have positive affect on their financial security today and in the future. Give us a call and let us help you do the same.