Last week, the Federal Reserve raised its benchmark short-term interest rate by a quarter point, to a range of .75 percent to one percent. It’s the third time since the Great Recession that the Fed has raised interest rates, and it’s projecting three more rate hikes in 2017.
While the rate is still low compared to the historic average, you may notice the effect in a few areas, especially if you consider the cumulative effect of the rate hikes in 2015, 2016, and last week. Here’s what you might expect:
Credit Cards and Home Equity Loans
If you owe money on your credit cards, get ready to feel the pain of higher interest. Banks usually pass along short-term interest rate hikes within weeks, and since many cards come with variable interest rates, the interest rates will float higher with the Fed’s decision. A recent article in the New York Times reported that nearly 40 percent of consumers carry a balance, and that among that group, the typical balance tops out at nearly $17,000.
Consumers with credit card debt have a couple of options here. First, they could pay down the balance before interest rates move higher, or second, they can look to take advantage of one of the many no-interest balance-transfer promotions offered by many credit card companies. The key, however, will be to pay off the balance before the promotional period expires – in some cases, that could be within a year or 18 months.
Home Equity Lines of Credit (HELOCs) also have variable rates, and are likely to see a rate increase sooner. Again, the best option is to pay off the line of credit as soon as possible.
Like credit cards and HELOCs, borrowing money to buy a car will also become more expensive. However, as Bankrate’s chief analyst Greg McBride notes in USA Today, the cumulative effect of three rate hikes won’t break the bank for most car buyers. He points out that the monthly payment for a new $25,000 vehicle would increase by about $9 per month.
The cost of an education will also increase for those with either a fixed or variable-rate federal loan, or a variable-rate loan from a private lender. One way to help combat the increase would be to lock in a fixed rate by refinancing, but that may not be easy for everyone. Student-loan marketplace LendEDU found that 43 percent of applicants could not qualify for refinancing.
While mortgages aren’t directly affected by Fed rate increases, you could still find yourself paying more to purchase a new home. That’s because Fed interest rate hikes can influence other factors that do affect mortgages (like the 10-year Treasury bond). Those with adjustable-rate mortgages may want to consider refinancing to a fixed-rate loan to avoid higher costs as interest rates rise. Will higher rates stop people from buying homes? Not according to Ali Wolf, Manager of Housing Economics for Meyers Research, which provides data to the homebuilding industry. Wolf says mortgage lenders anticipated that rate increase, and “baked” it in to their interest rates already. She also estimates that an increase in rates would not appreciably impact a borrower’s monthly payment enough to keep him or her from purchasing a home.
Unfortunately, while banks will be raising interest rates on credit-card borrowers, savers won’t likely be rewarded for putting money in their interest-bearing accounts anytime soon. Money-market accounts were paying an average of 0.11 percent annually, according to a March 16 report by Bankrate.com, about the same as they were a year ago. Consumer Reports suggests researching online banks, which tend to offer higher rates, or transfer a portion of your savings to a CD. However, prepare to leave your money in the CD for a long period of time to collect better rates.
According to Business Insider, the Fed’s rate increase gives us a chance to test whether higher rates could cause the stock market to fall – a theory apparently held by Berkshire Hathaway CEO Warren Buffet. Jonathan Golub of RBC Capital Markets disagrees, though, stating that the market advanced during each of the past five rate hike cycles.
The Bottom Line?
Get ready to pay more for some things in the short term, and watch out for other rate increases to follow. Don’t expect your savings to benefit greatly from the Fed’s rate increase, but do shop around. And finally, get ready for more rate increases in 2017, as the Fed tries to keep inflation at an even keel.
While the general advice offered here covers a lot of areas, remember that individual situations vary, and that some of the options presented here may not be appropriate for everyone. If you have specific questions about your finances, I invite you to contact us for a complimentary, no-obligation consultation. We look forward to serving you.
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