Will Your Debt Payments Go Up in 2015?

Interest rates are expected to go up this year, which is great news if you’ve been discouraged by the next-to-nothing interest rates banks pay on your savings. But if you have a home equity line of credit or a credit card with an interest rate tied to the rates set by the Federal Reserve, you may be looking at higher payments.

This news can make a big difference if you’re on a tight budget, because your payments can go up later this year.

“We know for certain that 2015 will see an increase in interest rates,” says Morgan Quinn with GOBankingRates.com. “Janet Yellen, the current Chair of the Federal Reserve, has confirmed a rate increase will happen in 2015 but she has not indicated when or by how much. Economists are trying to predict the potential path interest rates will take this year, but no one has any definitive information yet.”

When rates do go up, what does this mean to your monthly payments?

Mortgage Payments

If you already have a low fixed-rate mortgage, you’ve got nothing to worry about (as long as you don’t move and take out a new mortgage). But if you have a home equity line of credit or an adjustable-rate mortgage, you could see your rate — and payments — rise in 2015. How much? Freddie Mac predicts average 30-year mortgage rates will hit 4.6% in 2015, and 5.5% in 2016.

Let’s say you have a $50,000 balance on a home equity loan that is currently on a 15-year repayment schedule. At a 4.5% interest rate, the monthly payment is $382.50. But at a 5.5%, it goes up to $408.54. And if the rate rises another percentage point to 6.5%, the payment goes up to $435.55. The difference on a mortgage with a bigger balance — say a $250,000 — is even larger. (You can use this home affordability calculator to run the numbers for your own situation.)

What to do: Again, if you have a fixed-rate mortgage, you are fine. But if you have an adjustable rate mortgage (ARM) or an outstanding home equity line of credit (HELOC), check into refinancing into a fixed-rate loan while rates are still very low.

And if you are considering buying or refinancing your home, now is a good time to get serious. Check your credit reports and scores to see where you stand and talk with a mortgage professional to get pre-qualified.

Credit Card Payments

Most credit card programs carry variable rates. That means that when interest rates in the economy begin to rise, credit card rates may adjust as well. While you probably won’t see a drastic change in 2015, it could well be a “frog in the boiling pot of water” situation; gradual rate increases don’t feel so bad at first, but over time they make it difficult to pay off the debt (this calculator can tell you how long it will take you). It will be even worse if your rates are already steep and continue to rise.

What to do: Review your interest rates for any credit cards on which you carry a balance. If you don’t have a low rate already, consider consolidating debt with a low-interest credit card or personal loan. If you can’t qualify due to credit problems, a credit counseling agency may be able to help you lock in lower rates and pay off your balances in five years or less.

Auto Loans

Most auto loans carry fixed interest rates but a few have variable interest rates. Auto buyers probably don’t need to worry too much about rising rates in 2015, says Edmunds.com Chief Economist Lacey Plache. “Auto makers can and (I expect) will subsidize lower auto loan rates so as not to scare off buyers and lose the strong sales momentum they are enjoying at present,” she observes.

What to do: If you have a car loan at a decent rate, stick with it. If you will be shopping for a vehicle, don’t let fears of what will happen to rates rush you into a decision. Shop carefully for the right vehicle and the right auto loan before you walk into a dealership.

The Verdict

There’s a good chance interest rates will go up at least a little in 2015, and as a result, payments on loans with variable interest rates will rise as well. Though the impact will be small at first, over time they will continue to rise. As a result, it’s a good idea to lock in fixed rates on debts that may take you several years or more to pay off, if possible.

The truth is, though, your credit score will likely have more of an impact on your payments this year than any action the Fed takes. So be sure you review your credit reports and credit scores. Then get to work fixing problems and building the strongest credit you can. (You can get a free credit report overview at Credit.com.)