The Federal Reserve Just Raised Rates. Here's Dave Ramsey's Advice for Handling It
- The Federal Reserve announced an interest rate increase on Wednesday, May 4, 2022.
- Rates are moving up by a half-percentage point, with the new benchmark rate between 0.75% and 1.00%.
- Dave Ramsey has provided some suggestions for managing money when rates are rising, including not waiting to buy a home if you are ready now.
Finance expert Dave Ramsey has some tips for managing money when interest rates are rising.
The Federal Reserve announced an increase to the federal funds rate on Wednesday, May 4, 2022. This is a benchmark rate, and it was set at 0% to 0.25% during the heart of the pandemic to stimulate the economy.
With rampant inflation, however, the Federal Reserve raised rates in mid-March for the first time since 2018, and has now raised rates again. Today's increase of a half-percentage point was the largest since 2000 and brings the current benchmark rate to between 0.75% and 1.00%.
With interest rates increasing, your finances could be affected in a number of ways. And, in some cases, the impact will be detrimental as the cost of borrowing goes up. If you're not sure how to cope with this big rate increase, some advice from finance guru Dave Ramsey could be helpful. Here's what Ramsey suggests doing as rates go up.
You may not want to wait to buy a home
Ramsey's blog, Ramsey Solutions, explains that rising interest rates can make securing a mortgage loan more expensive. And he says some would-be buyers who like where they are may want to wait to buy until interest rates drop. However, that's not the case for everyone.
"For those who are truly ready to buy a home, you may not want to wait," Ramsey said. "That’s okay. The housing market should inform your decisions -- not make them for you. If you plan carefully, you can still buy a home."
He suggests making sure to put down at least 10% and confirming that your total mortgage payment doesn't exceed 25% of your take-home pay. But if you can do that, you shouldn't necessarily let rates stop you from moving forward.
That's especially true as he also explained that many home buyers will be scared away by high rates and this reduced demand could lead to more buying opportunities.
Borrowers with ARMs or HELOCs should prepare for rising rates
Adjustable-rate mortgages and home equity lines of credit both have variable rates, which means borrowing costs can go up when the Federal Reserve raises interest rates. As a result, Ramsey warns that homeowners with these types of debts should prepare for their borrowing costs to rise.
For those with ARMs, he suggests taking swift action to prevent this from occurring. "Don’t wait for your lender to raise your rate. Refinance to a fixed-rate 15-year mortgage to give you and your family some financial breathing room," his blog advises.
Of course, refinancing rates are also higher now than in recent months and may continue to climb in light of the Federal Reserve's recent announcement. Still, if you can qualify for an affordable fixed-rate mortgage loan, refinancing into it will allow you to avoid further rate increases and will provide you with the certainty of knowing how much your loan will cost going forward.
Ramey also urges those with HELOCs to protect themselves from increased borrowing costs. "If you’ve got a HELOC, you need to ditch it ASAP. Pay it off if you can -- if not, refinance to a 15-year fixed-rate mortgage," his blog suggests.
Whether you should heed Ramsey's advice or not depends on the rates you can qualify for on a home loan, and whether your new mortgage would be affordable for you. Still, he's absolutely right that this increase in rates could affect borrowing costs -- and you need to be prepared for that either by looking to lower your rates or by adjusting your budget so you can make higher monthly payments.
Alert: highest cash back card we've seen now has 0% intro APR until nearly 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.