Rising Tide of Interest Rates: Is It Time To Refinance? by John Adams

It’s now clear the economy is starting to hit on all eight cylinders - jobs are plentiful, tax rates are down, GDP is rising, and unemployment is almost a thing of the past.

But is there a price to pay for all this prosperity?  Now that the Federal Reserve is no longer printing imaginary dollars to jumpstart the recovery, what’s going to happen to interest rates?

I don’t have a crystal ball, but we did get a signal recently: the Federal Reserve announced two weeks ago that the CORE 12 MONTH INFLATION INDEX for March rose to 2%.

So what?

Well, it’s a big deal if you’re an economist!

It means that, on average, Americans are paying 2% more for everything than they did one year ago. That’s the first time that has happened since 2012, and it proves the economic engine heating up.

We all know that warming up is good, but overheating can be bad - really bad.

And one of the primary purposes of the Federal Reserve is to act like a radiator on that economic engine, and keep it running, but not too hot .  If it overheats, we get inflation, and that’s really bad for everyone.

So how does the Federal Reserve “cool things off”?

By raising interest rates. That draws investments OUT of the stock market and INTO the BOND market. It also makes it harder for borrowers to borrow. And if a borrower can’t get a loan to buy a new house, a dozen people lose their job for a year.

How should we respond to the prospect of higher interest rates?  

Here are three steps you should take NOW to get ready for the future:

1.  ELIMINATE ALL ADJUSTABLE RATE DEBT

That includes some home mortgages, auto loans, home equity loans, credit card debt, personal and paycheck type loans. Interest rates are on the way up, and now is a great time to lock in a long-term low fixed rate while we still have the chance.

2.  MAKE ALL DEBT LONG-TERM and FIXED RATE

If you own an asset that is paid off or nearly paid off, pull cash out now for as long as you can.  

I know that there are some so-called experts who scream “I’m debt free,” but that’s not smart in an environment of rising rates.

Put excess cash to work paying you MORE than it is costing you in interest. In the long run, you win big.

3.  GET OUT OF CASH & INTO REAL ESTATE

Consider diversifying your retirement savings into real estate.  If you’ve got cash sitting in your retirement fund paying you close to zero, it’s time to get it working for you.

You can now buy rental houses inside your 401(k) or IRA, and real estate has always served as an excellent hedge against inflation.

And here’s some special advice to you if you’re a millennial trying to decide whether to buy a first house:go buy a house today.

Try to find a house that the average American family will want to live in, in an area with good schools.

I can almost guarantee you that buying a home today will be one of the best investments you ever make.

As inflation works on our economy for the next few years, your home will rise in value along with the interest rates.

Meanwhile, you aren’t paying rent!  Instead, you are PAYING OFF your loan!!

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Atlanta native John Adams is an author, broadcaster and investor. He answers real estate questions on his call-in radio show on Money99.com every Saturday at 10 am. For more real estate information or to make a comment, visit his website at Money99.com, where you will find an expanded edition of this column, as well as links to helpful real estate information.