For Savings Accounts…Money Markets…CDs…Annuities…
Mortgages…Auto Loans
Forecasts of rising interest rates for years to come are affecting not only investors but also savers and borrowers. Bottom Line/Personal, which has explored the effects of rising rates on stocks and bonds in past issues, asked five personal-finance experts to describe the likely outlook for borrowers and savers.
MONEY-MARKET AND SAVINGS ACCOUNTS
Savers aren’t getting much right now. Even though yields on benchmark 10-year Treasury bonds jumped from 1.6% to nearly 3% in recent months—before pulling back recently—and even though they may hit 3.5% in 2014, yields on bank savings and money-market accounts have hardly budged. The annual percentage yield (APY) on these accounts averages 0.1%, although a few pay nearly 1%. And savers shouldn’t expect an increase of more than one-tenth or two-tenths of a percentage point over the next 12 months. The trigger for higher yields is likely to be the Federal Reserve raising short-term interest rates, probably in late 2014 or early 2015. Even then, savers will have to wait several years to reach the 4% yields on deposit accounts that banks were offering back in 2006.
What to do: For the highest recent yields on short-term savings—which are subject to change—consider these…
If you prefer a traditional bank, consider Capital One Bank 360 Savings Account, 0.75%. CapitalOne.com
CERTIFICATES OF DEPOSIT (CDs)
Yields on CDs have started to tick up but are paltry and won’t rise significantly until mid- to late-2014. The highest-yielding nationally available one-year CD at a bank was recently paying 1.1% at E-Loan.com…and a five-year CD was paying 2.01% at EverBank.com (which would result in $1,046 in interest on a $10,000 deposit).
What to do: If you are willing to accept a lower interest rate in exchange for the flexibility to shift to a higher-yielding CD when rates rise later, consider no-penalty or low-penalty CDs, which have relatively mild charges for early withdrawals. Ally Bank (Ally.com) offers a penalty-free 11-month CD with a 0.85% APY. It also has a three-year CD with a 1.2% APY and an early-withdrawal penalty equal to just 60 days of interest. Barclays Bank (Banking.BarclaysUS.com) has a five-year CD with a 2% APY and a penalty equal to 90 days of interest.
Alternative: Opt for a bump-up CD. If the bank raises CD rates after you open your account, you can request a bump up to the new rate. Examples: CIT Bank Two-Year Achiever CD has a 1.2% APY and allows you to increase your rate once during that term ($25,000 minimum), CIT.com…Ally Bank Raise Your Rate CD offers a four-year CD that starts at 1.3% and allows you two increases, Ally.com.
ANNUITIES
For savers looking to create a pension for themselves, the regular payouts you can get from a lifetime immediate annuity (one that keeps paying you no matter how long you live) are very low by historical standards and won’t become attractive for several years, assuming interest rates rise. However, yields on shorter-term multiyear guaranteed annuities, from three- to 10-year terms, have moved up enough to appear very attractive when compared with CDs. With this type of annuity, you hand over a cash lump sum to an insurance company and then you receive monthly, quarterly or semiannual interest payments. At the end of the term, you have 30 days to automatically renew the annuity or withdraw the principal.
What to do: Spread annuity purchases over several years. Buy from a solid insurer such as Guggenheim Life and Annuity, paying 2% for a three-year term…2.25% for four years…2.7% for five years…3.2% for seven years…and 3.5% for 10 years.
Caution: Unlike CDs, fixed-rate annuities are not protected by the Federal Deposit Insurance Corporation (FDIC), and early-withdrawal penalties may be far more severe than for CDs.
HOME MORTGAGES
Thirty-year fixed mortgage rates, which move largely based on the long-term outlook for interest rates, shot up this year from an average of 3.35% in May to 4.6% before pulling back some. Despite this climb, borrowers shouldn’t panic. Mortgage rates still are cheap from a historical perspective. (As recently as the summer of 2008, the 30-year fixed-rate mortgage stood at 6.5%.) Over the coming year, mortgage rates are unlikely to jump sharply again. Instead, they are likely to inch up slowly until there are tangible signs that economic growth is much stronger. The 30-year mortgage rate could reach 5% by the end of 2014 and hit 6% in 2016.
What to do: If you are looking to buy a home, select a lender and apply for a preapproved mortgage to find out what loan amount you can qualify for based on your income and credit information. Then ask your lender how incremental changes in mortgage rates will affect what you can afford. That way, you will have a better sense of how far rates can go up before your target home is beyond your budget. If your debt-to-income ratio (the percentage of total monthly income that goes to paying debts) goes past 40%, it becomes more difficult to get financing.
AUTO LOANS
Car buyers can continue to take advantage of interest rates on bank loans that are among the lowest in the past 30 years. Recently, the average interest rate on a 60-month auto loan was 4.01%, and you still can find bargain rates near 3% depending on your credit score. By taking a 60-month $30,000 loan at 3% instead of 4.01%, you save $814. Rates will rise slowly over the next 12 to 18 months, perhaps by one-quarter percentage point. And they may not hit 2005 levels, about 6%, until 2016 or beyond.
Although car prices have been rising amid strong demand—the average new vehicle cost $31,252 in August, up 3% from a year ago—the current low loan rates mean that your monthly payments won’t be much higher.
What to do: If you have stellar credit, get low-interest financing from the auto manufacturer’s lending agency. Some automakers will continue to offer from 0% to 1.99% rates for the next year because they don’t want to lose potential customers while the economy still is sluggish.
If you have to take a conventional bank loan, comparison-shop aggressively. There is more disparity in auto loan rates than in almost any other loan product. Many online banks (such as CapitalOne.com) and credit unions that anyone can join (AlliantCreditUnion.org and PenFed.org) offer consumers rates in the 1.5%-to-4% range.
Avoid the popular new 72-, 84- and 96-month car loans. While they keep your monthly payments low and allow even consumers with lower credit scores to purchase higher-priced luxury vehicles, these loans drive up the total interest you pay for your car, and because the loan period is longer, lenders charge higher interest rates, typically in the 5% range. Also, when it comes time to sell or trade in the vehicle several years from now, you may owe more on the car than it’s worth.
