The Federal Reserve aggressively raised its key federal funds rate seven times in 2022 in an effort to slow down the economy and moderate price growth. However, these actions also had the effect of more than doubling the prime rate, an interest rate set by banks and other lending institutions that lend money to businesses and individuals. That means businesses and individuals are paying higher interest rates for borrowed money, possibly for both existing adjustable-rate loans as well as newly originated fixed-rate loans.
If you have a variable rate loan and you’ve been watching your interest increase throughout 2022, you may be wondering if it would be best to try to cap that interest rate and ask your bank/lending institution to turn that variable-rate loan into a fixed-rate loan. This is an especially interesting question knowing that the Federal Reserve has signaled that they will continue to raise interest rates in 2023 at likely a more moderate quarter-point-per-increase pace (as evidenced by the Feb. 1st quarter- point increase), in an effort to continue to slow down the economy, as some signs indicate the economy has started to slow down. Some forecasters expect that interest rates in the second half of 2023 will begin to decline – meaning the economy is doing what the Federal Reserve wants it to do, which is slow down.
So, if you haven’t already switched your variable-rate loan to a fixed-rate loan, you may be late to the game. If interest rates do decline, would you want to be locked in to a fixed-rate loan that may eventually have you paying more interest compared to enduring a little more pain this year yet reaping lower-interest-rate rewards should interest rates decline later this year?
Please contact Rick Gilmartin, CPA, Tronconi Segarra & Associates LLP Principal, at 716.633.1373 or rgilmartin@tsacpa.com; or your Tronconi Segarra & Associates advisor, if you have questions or would like assistance evaluating your unique situation.
