A Fed rate hike is looming. Make these three smart moves
After a welcome pause in interest rate hikes last month, the Federal Reserve is expected to resume raising rates when they meet again at the end of July. The benchmark rate is currently set at a range between 5% and 5.25%. Although no one knows for sure where rates will head in the July meeting, many experts assume it will be at least slightly higher than that.
While higher rates make everything from mortgages to credit cards more expensive, there are some silver linings to note, particularly for savers. That said, timing is key, and savers will need to act swiftly and smartly to take advantage.
Three smart moves to make ahead of the next Fed rate hike
With interest rates expected to continue to head upward, it may make sense to make these three smart moves.
Open a high-yield savings account
High-yield savings accounts operate just like regular savings accounts do, albeit with a higher interest rate. Interest rates on regular accounts are 0.42%, according to the FDIC, but with a high-yield account, savers could earn exponentially more money.
There are some accounts offered online that earn 11 times the national average. Interest rates on these accounts are variable, however, meaning that they will increase next week if the Fed bumps up the rates. So by opening one now, you'll be better positioned to take advantage of any increased rate activity.
Wait to open a CD
Certificate of deposit (CD) accounts are currently offering higher interest rates than high-yield savings accounts. But those rates are locked in for the term of the loan (unless you're willing to pay a penalty to withdraw it early). So while you can get a great rate on a CD today, especially if you open a short-term one, you may be better off waiting a week until the Fed raises rates.
By waiting, you'll be eligible for the higher rate and won't be locked in for the lower one. Or, you could ladder your CDs and open one now and another when the rates rise.
Lock in a mortgage rate
Mortgage rates are significantly higher than what they were in recent years but, historically speaking, they're still relatively low. If you know you need to move — or want to have the option to buy in the near future — then it may make sense to get pre-approved and lock in a rate now.
While mortgage rates are currently around 7% (far from the 3% range in 2020), that's still likely to be a lower figure than what you can get if you wait to apply in August. While 0.25 percentage point may not seem like much month over month, it will add up to a significant sum over a 15- or 30-year mortgage.
Not sure what mortgage rate you would qualify for? Find out here now!
The bottom line
Interest rate hikes are generally received poorly due to the rising cost of borrowing. Still, there are some smart moves you can make in advance to ease the burden. By opening a high-yield savings account today you'll be better positioned to earn the higher interest rate when they eventually go up. Similarly, you may want to rate until the rise is official before opening a CD (or ladder your accounts to take advantage of both rates). Finally, those considering buying a home soon should strongly consider locking in a mortgage rate now before it inevitably ticks up later in July.
