How to Benefit from Rising Interest Rates

In the Federal Reserver’s meeting last week, its clear that another interest rate hike is on the table for as early as March. The fed has already increased rates once in 2015 and in 2016 and most likely, they are going to increase two to three times in 2017. From a personal finance perspective, I think that is good news for savers like me anyways. Here are some potential opportunities to benefit from rising interest rates.

Lock-in Low Long-term Rates on Existing Financing

If you have a mortgage or other loans, now if the time to refinance them to get the lowest rate possible and lock it in for a long period before interest rates start rising. I am looking to refinance my mortgage, which is on a 7-year adjustable on it. While it still has 4 more years to go, I think I can get a better rate than the current 3.125% rate I have. With the recent trend of downward rate movement, I am looking to refinance my mortgage.

Buy with Financing Now

If you are planning a huge purchase for your business or personal use, now is the time to do it. This does not mean that you should spend more than you should or buy things that you don’t need. But if you have a genuine spend that you need to do in near future, it might be worth doing it now and pay low rates.

Invest in Real Estate

With inflation, all real assets tend to rise in value where as dollar looses its buying power. If you have cash, now is the time to invest in real-estate and ride the inflation wave. However, with real-estate prices also at or near all-time highs in several markets such as here in San Francisco, you will have to be selective and careful in where you deploy your capital. I am personally looking to buy some real-estate in heartland of America this year, which is where I think the growth is going to be in the next few years.

Another impact on real-estate from rising rates would be the increase in mortgage rates. The mortgage rates have already gone up by about 50 to 75 basis points since the election. With rates rising further, fewer and fewer people would be able to afford buying a house resulting in cooling down of housing market on the coasts. This will present opportunities to buy if you want to invest in real-estate. This will take some time to pan out, probably 1-2 years at least but will present good opportunities if you want to invest in real-estate in coasts.

Become a Lender

One way lenders make money in by borrowing money for cheap from the Fed and loaning out that money to individual borrowers at a higher rate and making money on spread (difference between the rate at which banks lend money and rate at which they borrow money). So when the interest rates rise, banks benefit because now they can charge higher spread on the loans. One way to benefit from rising interest rates is by being the bank and lending money to those who are need it. One great way to do it is through peer-to-peer lending sites such as Lending Club and Prosper. These companies offer loans to borrowers who do not qualify for traditional bank financing due to their credit, income or other factors. These borrowers already pay higher interest rates than what bank charges them and gives investors an above-average returns. As the Fed increases rates, the borrowing cost through peer-to-peer lending sites increases and investor returns would increase. I have invested some money through both Lending Club and Prosper and have been getting ~10%+ returns so far.

Buy Short-term Investments

If you are The yields have been great on bonds during the low-interest rate environment. Once the Fed starts increasing rates, the yields on longer-term bonds will be impacted. If you are looking to deploy your capital in safe investments such as CDs or bonds, opt for short-term for the time being. You do not want to put your cash in long-term bond or CD at today’s low rate and get stuck once the rates start rising.

Travel Abroad

With inflation rising, the dollar becomes stronger against most foreign currencies. That means a significant savings for traveling abroad. I usually take two vacations with my family each year and last few years we have been looking more and more outside of U.S. for our vacation. With dollar getting stronger, you will be getting more out of your Europe or Mexico vacation for the same dollar.

Save More Money

Finally, rising interest rates are good news for anybody who is saving money. The returns on certificate of deposits and savings accounts have been dismal for almost a decade due to Fed’s near zero interest rate policy. Rising interest rates will ensure that you get better yields on your money in certificate of deposit, savings or money market accounts. That’s another motivation to save more money if you were lazy to continuously invest your money in other high-yielding investments.

Are you set up to benefit from rising interest rates? If so, what strategies are you using? Please share in comments below.

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