Interest Rate Hikes

graph-163509_1280The Federal Reserve Board passed on the opportunity to raise the prime interest rate in September, but it is a forgone conclusion that it won’t be long before the rate does rise, maybe as early as their next meeting in December. When it happens, higher interest rates will affect each typical American family in different ways.

Here are some areas to aware of when interest rates begin to increase and how they may affect you.

Investments

Savings and money market accounts today offer an average interest rate of only 0.44%, according to Bankrate.com.  Savers have been the big losers through the low-rate environment of the past seven years.  With the typical one-year certificate of deposit yielding just 1 percent and money-market funds paying next to nothing, savers currently lose cash after factoring in inflation and taxes. Rising interest rates should increase yields on personal savings, which will give you an increased incentive to save rather than spend.

There are several important Biblical principles of saving that have to be considered. The first is to balance our saving and investing with generosity. Jesus told the parable of a farmer who harvested a bumper crop and said to himself, “‘I don’t have a place to keep all my crops…I will tear down my barns and build bigger ones, where I will store the grain and all my other goods’…But God said to him, ‘You fool!’ …This is how it is with those who pile up riches for themselves but are not rich in God’s sight.” (Luke 12:16-21, 34).

The key word in this parable is the word ALL. Jesus called the farmer foolish because he saved everything, and didn’t balance saving with giving.  If we only pile up our investments, they will pull on our hearts like gravity.  Our affection will be drawn away from God toward them because “Where your treasure is, there also will your heart be.” (Luke 12:34)  However, if we give generously to God, we can invest and still love him with all of our heart.

Let’s face it—most people want to get rich.  I’ll never forget how surprised I was the first time I realized the Bible’s caution against it: “those who want to get rich fall into temptation and are caught in the trap of many foolish and harmful desires, which pull them down to ruin and destruction” (1 Timothy 6:9).  This verse declares that those who want to get rich give in to temptations and desires that ultimately lead to ruin.

Why is the quest to get rich so incredibly dangerous? The next verse from Timothy answers that question: “For the love of money is a source of all kinds of evil. Some have been so eager to have it that they have wandered away from the faith and have broken their hearts with many sorrows.” (1 Timothy 6:10)

When we want to get rich, we actually love money. That has consequences I witnessed firsthand. I started mowing lawns when I was about 8 years old and even had a savings account. I remember that I bought my first suit when I was in the third grade with money I had earned. While I was in college, I paid for all of my room, board, books and spending money by working in the school cafeteria and running my own janitorial company.

Once I graduated from college, got married and started working, money wasn’t a real issue as we always had enough for what we wanted. When I was about 35, even though I had a job that paid well, I started working a part time sales job.  The allure of this job was about all the money that I could make. I began to fantasize about the nice cars we could own, about really big beautiful houses and about having enough wealth that my family would be set for generations!

As my desires to become rich reached new heights, I left my fulltime job with a salary to pursue my dream job, which was based 100% on commissions. Unfortunately, the money stopped flowing and the debt started growing!

However, once I learned God’s perspective, my attitude changed dramatically. Instead of wanting to get rich, I wanted to be a faithful steward; wisely handling the money God blessed me with. I wanted to please God, and becoming rich lost its importance as I developed a new relationship with him.

It is not wrong to become rich. Many heroes of the faith, such as Job, Abraham, and David were rich. In fact, we rejoice when God enables a person who has been a faithful steward to prosper. Nothing is wrong with becoming wealthy if it is a by-product of being faithful. But it is wrong to strive for riches if getting rich becomes an obsession and we cannot be faithful to God because of that obsession.

Mortgages

Mortgages are another area that will impact people in the pocketbook if interest rates rise. Interest rates are a big component for the majority of homebuyers—after all, how many people can actually purchase a home and pay for it with cash? With interest rates drifting lower for more than three decades, home affordability has improved dramatically, even with home prices also rising over that stretch.

If you already locked in a 30-year mortgage at the ultra-low rates that have prevailed over the past several years, you are to be congratulated. But the millions of Americans who hold adjustable-rate mortgages could end up paying more because interest payments on variable mortgages will increase.  This will have a big impact on consumer spending as it means a significant impact on personal discretionary income.

Compass Catholic always encourages people to be sure the house they are buying is affordable. So many people only look at the mortgage payment when calculating housing costs, but housing costs include a lot of other things: maintenance (you may need to buy a dishwasher now, but in 5 years the roof might need to be replaced and that can be a major expense); homeowner association dues; furniture/appliances; property tax; homeowners insurance; water; utilities; pest control, etc.

Your mortgage payment (which normally includes principal, interest, property taxes and Insurance) should be about 35-40% of your total housing budget. The other items mentioned previously will easily consume the remaining 60-65% of your housing budget.

One of my favorite verses related to home ownership is from Luke 14:28-30.  “Which of you wishing to construct a tower does not first sit down and calculate the cost to see if there is enough for its completion? Otherwise, after laying the foundation and finding himself unable to finish the work the onlookers should laugh at him and say, ‘This one began to build but did not have the resources to finish.’ “ This verse sums up the fact that when we are planning to buy a home we need to include ALL costs associated with the home as we calculate what we can afford.

Consumer Loans

Consumer loans are another area where we can get hit in the pocketbook if interest rates increase. Increases in the fed interest rate means an increase in interest payments on credit cards and loans. The higher interest rates will discourage people from borrowing, which we think is great.  Carrying a balance on credit cards is just throwing money away. If you have an average credit card balance of $6,500 at  $18% interest, you are paying about $100/month in interest ONLY—with no payments on the principal. There is a verse from Sirach, which reads: “Do not follow your base desires, but restrain your appetites.” And that is where a lot of people get into trouble with credit cards—buying stuff they don’t need with money they don’t have.

With all this talk about rising interest rates, it’s worth noting that many Americans wouldn’t be hurt much by higher rates, including people who pay off their credit cards each month and homeowners who locked in attractive fixed-rate mortgages already and the people who are in good shape financially with emergency savings and a modest lifestyle.

The volatility of the stock market that we have seen in recent weeks will actually have a greater impact on people’s financial lives than the small rate increase that the Fed will initiate sometime in the near future—probably mid-December or mid-March.

People just need to stay calm, make sure that their financial houses are in order, work on paying off all of their debt and increase their savings

Lastly, we need to keep in mind the verse from Romans 8:28: “And we know that God causes all things to work together for good to those who love God, to those who are called according to his purpose.”

No matter what happens to interest rates, or consumer confidence, God uses everything for good and for his purpose.

-Jon Bean