MINNEAPOLIS — Buying a house or a car, using credit cards, or taking on a college loan all have the ability to create debt. Adding more of it in the months ahead has people nervous.
“I feel like I had a clear vision of what the next year was gonna look like and now it’s really muddy,” said Eric Bergman of Minneapolis.
He was hoping to buy a house last year, and even had a mortgage rate locked in at 3 percent. But the bidding war that drove up home prices forced him to pause that plan.
Now, there’s another reason he’ll be waiting longer than anticipated.
The Federal Reserve Bank raised interest rates by 0.75% this week, leading to a domino effect of rate hikes across all types of loans and debt. The current average mortgage rate in Minnesota for a 30-year-fixed is now 5.92% according to Bankrate, a number that will likely climb due to the Fed’s decision.
“Now I feel like it could be a couple years just before the rates maybe tick down,” said Bergman.
Some financial experts, however, don’t want that number to scare people off.
“If I were buying now, I would lock in [the rate],” said Murray Frank, a finance professor at the Carlson School of Management at the University of Minnesota.
He says locking in a mortgage rate now might be better than getting stuck with a higher rate down the road. But that’s not his most prudent advice.
“It’s extremely, extremely important, if people can, to pay off those credit card balances,” Frank said.
Credit card interest rates are often the highest rates people have, and they’ll go higher due to the Fed’s decision.
Next to pay off would be student loans, specifically if the rate is varied instead of fixed. Loans with varied interest have been rising and will continue to do so.
“They can be quite punishing,” said Frank.
He suggested people dip into their savings accounts to pay off credit card and student loan debt if possible.
If you’re contemplating getting a new or used car, ensure the car loan is fixed. Opting to repair the vehicle you own might also be a better financial decision.
“This is not the sort of environment where I would like to take on risky debts,” said Frank.
The sum up Frank’s advice: Pay down debt now, especially if the interest rates are not fixed. Avoid taking on debt with variable interest rates if you can.
Source: CBS Minnesota