27 September 2020

Rising Interest Rates Good For Retirees

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Here’s something that may pique your interest.  

The U.S. economy has been strong, unemployment is low, and the Federal Reserve has been raising its benchmark rate while signaling more increases to come. As a consequence, consumer interest rates have been rising.  

That’s good news for savers, who have been earning insultingly low returns on savings accounts for years, but it’s bad news for home-shoppers and borrowers — particularly people with adjustable- and variable-rate loans.  

For savers, and particularly for retirees who don’t want to risk their nest eggs in the stock market, the post-recession years have been marked by banks offering close-to-zero interest rates on savings. It’s hardly been worth shopping around for the best deal, until this year.  

Banks, which benefit from higher interest rates, have been running more advertisements and even some promotions to attract deposits, so that they’ll be able to lend more money at higher rates.  

While some traditional banks and credit unions are still offering fraction-of-a-percent interest rates on savings, there are others — online-only banks in particular — paying close to 2 percent interest on plain-vanilla savings accounts.  

Earning 2 percent on your savings isn’t really that much, particularly if you don’t have much money on which to earn interest, but it’s more than before and every bit helps. With banks offering incentives for new accounts, some people could get as much money from switching banks as they might from a year’s worth of interest, so consider shopping around.  

If you are bank-shopping, make sure to look at all of the interest rates, because they aren’t always what you might expect. For example, online-only bank Capital One 360 is paying 1 percent interest on savings and 1.85 percent on money market accounts, while rival Ally is advertising 1.9 percent on savings accounts and 1 percent or less on money markets.  

For longer-term savings, such as certificates of deposit, remember that the Fed expects rates to keep rising. It’s easy to find 12-month CDs that pay 2.5 percent interest now, but longer-term CDs aren’t paying much more than that. Locking up some money in a 5-year CD paying 3 percent interest might not look great a few years from now.  

But some certificates of deposit, for terms longer than one year, will allow for one or more rate resets and that’s worth considering. Sometimes, those CDs pay lower interest initially, in exchange for being able to reset the rate later, but it’s an attractive feature if the initial interest rate is competitive.  

Higher interest rates are also forcing home shoppers to factor in higher monthly mortgage payments, with the likelihood that rates will keep increasing as the Federal Reserve raises interest rates to keep the economy from overheating. Higher borrowing costs potentially slow the real estate market, depressing asking prices, but for now in the greater Charleston area all the latest statistics indicate it’s firmly a seller’s market.  

A year ago, the average 30-year mortgage rate was slightly below 4 percent. Now, it’s are close to 5 percent. That doesn’t sound like a lot, but it’s enough to add $118 each month to the payment on a $200,000 loan.  

According to Realtor.com, about a quarter of the homes for sale in Charleston County are being offered at reduced prices, but sellers in September were getting, on average, 95.6 percent of original asking prices for single-family homes, according to the Charleston Trident Association of Realtors.  

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