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How Borrowers Should Handle Rising Interest Rates

As interest rates rise, find out the important financial decisions that borrowers need to make to save money.

By
Laura Adams, MBA
5-minute read
Episode #327

How Borrowers Should Handle Rising Interest Rates

For the past few years, interest rates have been at historic lows. However, as the economy and housing market perks up, the tide is turning and rates are creeping back up.

As interest rates rise, there are important financial decisions that borrowers need to make. I’ll tell you how to save money even as the economy heats up.

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What Happens When Interest Rates Rise

In order to understand how interest rates affect your finances, here’s some basic background about what happens when rates rise.

You probably already know that when interest rates go up, the cost to borrow money also increases. For instance, the monthly principal and interest payment for a 30-year, $200,000 mortgage at 3.5% interest is $898. But the same loan cost $1,013 if the interest rate goes up to 4.5%. You’ll pay $115 more per month for the same house if rates rise just 1%.

Certainly, no one likes to pay more interest for a home, car, or credit card than they have to. However, the upside to rising interest rates is that banks earn more from borrowers and can pay out more interest to savers. That means you can earn more interest on the money you keep in savings, money market accounts, and CDs.

Rising interest rates can also affect equity investments in a positive way. Since corporations form the backbone of the economy, interest rates typically go up when they’re doing well. Investors have the opportunity to share in their profits by owning stocks.

For instance...

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.