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Hint: You’ll need to be very careful.
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Many consumers are downright tired of rampant inflation at this point. And that’s understandable. But unfortunately, the problem doesn’t seem to be fading away.
The Bureau of Labor Statistics just released its February Consumer Price Index (CPI). The CPI index measures changes in the cost of common goods and services.
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On an annual basis, inflation fell from 6.4% in January to 6% in February. But on a month-over-month basis, inflation rose 0.4% in February. This could lead to more interest rate hikes on the part of the Federal Reserve.
Now, it’s a myth that the Fed is tasked with setting consumer borrowing rates, like auto loan and mortgage rates. Those rates are determined by lenders individually.
Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But when the Fed raises its benchmark interest rate, consumer borrowing costs tend to rise as a result. And that’s why consumers looking to tap their home equity need to be very careful in the coming months.
It’s not the best time to borrow against your home
From an equity standpoint, many homeowners have the option to borrow against their properties because home values are still up on a national scale. But from a borrowing rate perspective, it’s a bad time to sign a home equity loan or line of credit (HELOC).
Since borrowing rates are up in general, you’re looking at paying more any time you borrow, whether it’s a car loan or a personal loan. And since we could see more rate hikes out of the Fed in the coming months, a home equity loan or HELOC might end up being more expensive than you bargained for.
What’s more, HELOCs are especially dangerous at a time when interest rates are on the rise because unlike home equity loans, HELOCs tend to come with variable interest rates. That means your payments under a HELOC have the potential to climb in general. And they might climb at a faster pace if the Fed is aggressive with rate hikes this year.
Hold off on borrowing if you can
If you have a pressing need for money, then you may not be able to put off your home equity loan or HELOC application. But if the situation can wait, then it could pay to hold off and see if borrowing rates come down next year.
Let’s say you’re borrowing against your home to renovate your kitchen, but right now, your kitchen is perfectly functional. You might want a newer one soon so your space is nicer to look at and there’s more storage room in your cabinets. But signing a loan now might mean paying a lot more money, so if you’re able to hold off, that could result in savings.
Plus, when you sign a loan at a higher interest rate, you risk struggling with your payments and falling behind on them. That could have huge financial consequences, like credit score damage, and your recovery from that could take many years.
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