Interest rates have an impact on everything from borrowing costs to investment opportunities. Higher rates these days might feel unfamiliar, especially for younger generations used to the COVID-era low mortgage rates, but they don’t mean you need to put your financial goals on hold.
In the wake of the Fed raising interest rates for the first time in three years this September, here are three practical ways interest rates can affect your finances and why a thoughtful investment strategy matters.
1. Buying or Selling a Home Could Require a Different Approach
Higher mortgage rates change the math for everyone involved, buta mortgage rate in the 7% to 7.5% range is not historically unusual. In the 1980s, average 30-year mortgage rates were often in the double digits, reaching much higher levels than today. The exceptionally low rates seen during the pandemic were the exception, not the long-term norm.
That distinction matters, particularly for younger buyers who are comparing today's market with the one their parents or older relatives previously experienced.
What does this mean for buyers and sellers?
For buyers: The same home costs more per month than it did when rates were lower, which can shrink your budget or delay a purchase further. Instead of waiting for rates to return to previous lows, focus on what you can reasonably afford today. Consider the full cost of homeownership, including property taxes, insurance, maintenance, and other expenses. Explore different loan terms and evaluate whether buying a home fits your broader financial goals.
For sellers: For homeowners who locked in lower rates years ago, they are hesitant to give them up, which means fewer homes on the market. At the same time, buyers can have less purchasing power, so pricing and timing become especially important for getting a home sold. If you’re considering selling, it’s important to review comparable properties and the costs of your next move. Selling might still make sense now, even if the market looks different from a few years ago.
2. Your Investment Strategy Matters More Than the Headlines
Why does a buy-and-hold strategy matter?
When you hold an individual bond to maturity, you generally receive its initial principal at maturity, assuming the issuer meets its obligations. During the process, you typically receive the interest payments specified by the bond's terms.
Bond funds, however, generally do not have a single maturity date when investors are guaranteed the return of their original investment. Their values and income distributions can change as the underlying bonds and market conditions change.
Higher rates can also create opportunities. As bonds mature or cash becomes available for reinvestment, investors may be able to purchase new bonds offering more attractive yields than those available just a few years ago.
This is an important reminder that investment decisions should be based more on each holding’s purpose, your time horizon, and overarching financial goals, rather than short-term market changes.
3. Borrowing, Saving, and Your Financial Priorities Might Need a Second Look
Interest rates don't affect everyone in the same way. Higher rates can make borrowing more expensive, but they can also create opportunities for savers and investors with cash to put to work.
Consider a few practical steps:
Pay attention to debt. If you have credit cards or other debt with interest rates that can change, your payments could go up. Focus on paying down high-interest debt while keeping enough money set aside for emergencies.
Make your savings work for you. Compare interest rates on savings accounts and CDs to see if your money could earn more. Just make sure you understand any fees or rules for future withdrawals.
Think before making big purchases. If you're planning to buy a car, renovate your home, or pay for school, compare loan options and monthly payments. Make sure the cost fits your budget before committing.
Stick to your long-term goals. Higher interest rates might change how you save, spend, or borrow, but you still need a plan that supports your financial future.
For younger adults who have spent much of their financial lives in a low-rate environment, this couldbe the first time interest rates have played such a visible role in everyday decisions. Understanding how rates affect both the cost of debt and potential savings returns can help you make more informed choices.
If you have questions about how today's interest rate environment could affect your financial plan, reach out to our team. At TruPlan Financial Advisors, we’re here to help you evaluate your options and determine whether your current strategy still supports the future you're working toward.