Finances FYI Presented by JPMorgan Chase
As fall arrives, the air gets crisp, and the leaves turn stunning shades of orange, gold, and red. As you snuggle up in your favorite sweater and sip a pumpkin latte, it’s a perfect time to reflect on the past year and think about your future financial goals.
Learning more about how you can benefit from financial products like CDs, fixed-rate mortgages, and fixed-rate personal loans gives you some options to save money, along with some financial planning tips.
What Is a Fixed-Rate CD?
A fixed-rate certificate of deposit (CD) is a savings account that has a set interest rate over its entire term. You can purchase CDs online and in person at banking institutions or credit unions.
In this type of savings vehicle, you don’t touch the funds during the CD term, which is usually in increments of three months up to one year. Then they switch to two, three, and five-year terms, with some CDs offering 10-year terms.
Typically, the longer the fixed-rate CD’s term, the higher the interest rate. When the CD reaches maturity, you can either withdraw the entire amount or roll it into another CD.
Benefits of a Fixed-Rate CD
One of the key advantages of a fixed-rate CD is that the financial institution guarantees returns at the gross interest rate over the CD’s term. Other benefits include:
- The interest rate remains constant regardless of economic conditions.
- CDs are low-risk investments, as the FDIC protects deposits up to a certain limit, even if the bank fails.
- You can accurately calculate a CD’s future value because the interest rate is stable.
- Fixed-rate CDs are locked in for a set time, which helps discourage spending. Less spending promotes saving and enables you to work toward long-term financial goals.
Disadvantages include lower returns than riskier stocks and mutual funds, funds are not available for emergencies, and you may incur penalties and lose part of the interest earned with an early withdrawal.
What Is a Fixed-Rate Mortgage?
If you’re homebuying, a fixed-rate mortgage is exactly what the name implies: the interest rate is locked in for the entire loan term.
Fixed-rate mortgage terms are usually 30-year, 20-year, 15-year, and 10-year, though some lenders offer other terms like eight or 40-year loans.
Thirty-year loans typically have lower monthly payments and higher interest rates. Fifteen-year loans have lower interest rates but generally higher payments.
After closing on your home, your mortgage rate stays fixed, regardless of market fluctuations. When following an amortization schedule, most of your mortgage payment goes towards interest in the beginning of the loan, and more goes towards the principal at the end.
Types of Fixed-Rate Mortgages
Different lenders have different requirements for fixed-rate mortgages. Two of the most common fixed-rate mortgages are conventional and government-backed.
- Conventional mortgages have stricter requirements than government-backed mortgages. Minimum credit score is typically 620 with a debt-to-income ratio no higher than 43%. Banks, credit unions, online lenders, and mortgage companies offer conventional mortgages.
- Government-backed mortgages include FHA loans, VA loans, and USDA loans, which are all insured or guaranteed by a federal agency if a borrower defaults on the loan. FHA loans have lower credit requirements. VA loans are for qualified military service members, veterans, and surviving spouses. USDA loans are for low- and moderate-income borrowers in rural areas.
Most lenders allow you to pay more on your loan principal to pay it off faster if you are able. Unlike an adjustable-rate mortgage (ARM) with fluctuating interest rates, a fixed-rate mortgage offers stable principal and interest payments.
What Is a Fixed-Rate Personal Loan?
Personal loans serve a wide range of purposes, including debt consolidation, home improvements, college expenses, or a vacation.
A fixed-rate personal loan is an installment loan in which the loan interest rate stays the same throughout the life of the loan.
Interest rates vary by lender, sometimes according to borrowers’ credit scores, with lower scores having higher interest rates.
A key advantage of fixed-rate personal loans is predictable monthly payments, regardless of market conditions.
If you consolidate debt, a fixed-rate loan with a low interest rate saves you money on high-interest charges, like 29% on a credit card versus 8% on a fixed-rate loan. Your loan rate usually depends on your credit score and other qualifying criteria.
Fall Financial Planning Tips
Fall is an excellent time to assess your finances and your financial goals. Follow these financial planning tips to ensure you’re on track heading into the end of the year.
- Review summer spending and consider creating a budget to track where future dollars go and identify areas to cut corners.
- Assess credit card debt and form a plan to pay it off.
- Set aside money now for holiday travel and other expenses.
- Review your savings and investments and consult a financial planner to discuss ways to hit your retirement savings goals.
- Prepare now for tax season and make a tax-advantaged IRA contribution, take a required minimum distribution, or make charitable contributions to reduce your tax liability.
Locking in with fixed-rate financial products and following these financial planning tips will help you keep your finances in shape as the temperatures drop and colors pop this fall.
Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.
