Homeowners today are spoiled by years of record-low interest rates, but that's about to change. Historically, rates tend to balance out several percentage points above where we've gotten used to seeing them, and as the federal deficit grows, pressure to hike rates will increase. So what is a homeowner to do?
First of all, your most immediate concern may not be the mortgage. Let's be very clear about this; a fixed rate is just that – fixed. However, if you've sprung for any of the ultra-cheap adjustable mortgages, you have reason to be concerned. Still, there just may be another, even greater hazard to your financial health just itching to bleed you dry.
If you carry revolving debt (credit cards) you are all but guaranteed to see swift, corresponding hikes in card rates whenever the Federal Reserve makes a move. You're already paying much more for your card debt than you do for your mortgage, and let's just say the credit card companies about as shy about jacking up rates as they are forgiving if you miss a payment. Make it a priority to pay down outstanding revolving debt.
So what about mortgages? There are all kinds of adjustables, hybrids and more or less complex options today, but the key aspect you're looking for is whether the rate you pay each month is fixed or tied to whatever the Fed does. If your mortgage belongs in the latter category, you may want to consider locking in the rates. Sure, a refinancing may have limited benefit in the short run and may even bump up your monthly payments somewhat - but if history holds true and the rates are heading for significant increases, you'll hurt much, much more if you stay put.
Be careful about the length of the mortgage, however. If you've been paying for 10 years on a 30-year mortgage, you have 20 years left until you own the place free and clear. By offering to refinance with a new 30-year mortgage the lender will all but certainly give you a better monthly payment, but beware: you'll tack on 10 more years of monthly interest payments. That's great news for the lender, but you should opt for a length that is equal, or better yet, shorter, to the original mortgage. If you can swing a fixed, 15-year mortgage in this situation, you'll save a boatload of money when all is said and done.
This all assumes that you're planning to stay put. Another aspect about rising interest rates is that it undermines home values. The housing market varies greatly between towns, but in most cases higher interest rates means that potential buyers lose purchasing power. Remember, their ceiling tends to be their monthly payments, not the sticker price in itself. A $200,000 home with a 5.5% mortgage is a completely different story than the exact same house for $200,000 with a 10% mortgage.
That means, if you're planning to sell, you may want to do this sooner rather than later. If you wait until rates go up to put your house on the market, your buyers are weaker and you may have to settle for a lower price.
Lastly, you should review your investment portfolio. Bonds are interest rate sensitive and will take a hit every time the rates go up - if you think they're hikes on the horizon, ditch the bonds. If you have a decently sized portfolio, you should also consult with a financial advisor about inflation-proof investment vehicles. There are no crystal balls, but nobody ever went broke by diversifying too much.
