The US Federal Reserve raised its interest rates for the first time in 2016 at the end of December. An article by Newsweek
stated, “The rate increase…raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent. Bond yields and the dollar rose after the rate decision while stocks were mixed with financials and tech the only two sectors to show gains.”
What are the effects of a higher interest rate? For one thing, investors may see higher returns on publicly traded securities for the first time in a while. According to a Washington Post
article, savers “may finally start to feel some relief after years of meager returns on investments in safe assets such as certificates of deposits and money market funds. Still, analysts cautioned that any improvement would likely be slow.”
However, the hike in interest rate and potential increase in returns "may not improve quickly enough from the perspective of those individuals who have already suffered through more than a half decade of historically low, and often inadequate, fixed income yields," said Michael Thompson, chairman of S&P Investment Advisory Services.
The higher interest rate will more than likely have an effect on the nation’s real estate market. With a higher interest rate, investors may see mortgage rates rise. If, for example, an investor can get a mortgage at a low rate now, whereas in a year or two the interest rate is high, it may be enticing for some real estate investors to try and buy now, or to refinance a current mortgage.
In the retirement industry, self-directed IRA real estate
owners may want to refinance any current mortgages held within their account(s), or take out a new loan on a property that their IRA owns 100% of in order to get control of an additional property(s) while the rates are still low. An IRA real estate owner who owns 100% of a property but who decides to take out a loan for the mortgage will receive cash in hand, which can be used to take out a loan on an additional IRA property.
By this line of thinking, property(s) that are heavily leveraged when the interest rate is low can allow an investor to make a larger purchase (and hopefully more lucrative) purchase with their tax-advantaged IRA, which will ideally lead to a higher return down the road. The long-term investing outlook inherent in IRA investing can offer a chance to capitalize on financial trends that are often on a slow pace of change; such as interest rates.
Contact New Direction IRA
today to learn more about IRA mortgages, distribution rules
, and more.