What you need to know about rising interest rates
Article provided by Greg Stokes with Hankcock Mortgage Partners, LLC. For more information on services offered by Hankcock Mortgage Partners please see contact info below this article.
For the average American, the threat of rising interest rates isn’t necessarily bad – it’s a sign that the economy is doing well. But it will make borrowing more expensive. Here’s a breakdown of what could happen to your student loan, savings account, mortgage, car loan and credit card.
Seemingly everyone is on edge about the Federal Reserve’s next moves – with reason. Throughout the nearly nine-year bull market run, the Fed held rates near zero. But recent signs of rising inflation could push the central bank into hiking rates more aggressively, which will have far-reaching consequences for consumers.
Inflation is accelerating and may well push interest rates higher, allowing the Fed to move policy rates three times this year, and perhaps even four.
For the average American, the threat of rising interest rates isn’t necessarily bad. It’s generally considered a sign that the economy is doing well, which is what helped jump-start a wave of bonuses and may lead to more pay increases down the road.
Financial markets shudder at the thought of higher inflation, simply because from an investment standpoint, inflation erodes the buying power of future earnings. For consumers, a little bit of inflation is a good thing – that’s what enables their boss to give them a raise.
However, in your daily life, higher interest rates also mean that you’ll have to “pay up” to access credit. For most consumers, rising interest rates, at least at this stage, don’t impact your ability to borrow, only the rate you pay to borrow. That includes how much you pay in interest on credit cards or a home equity line of credit (HELOC).
It will have decidedly less of an effect on how much you earn in interest on savings accounts because, even after a Fed rate hike, banks have little incentive to pass on any of the increase to their customers, which means interest on deposits on average likely will remain near rock bottom. But you may find significantly higher savings rates by shopping around and switching to an online bank.
If you’re concerned about what this means for everything from your student loan bill to savings account, here’s a breakdown of what could happen:
- Credit Cards – Most credit cards have a variable rate with a direct connection to the Fed’s benchmark rate. Expect your interest rate to rise in tandem. A 0.25 percent rate hike means cardholders will pay an extra $2.50 a year in interest for every $1,000 of credit card debt.
- Mortgages – Fed rates have an indirect influence on long-term fixed mortgage rates, which are generally pegged to yields on U.S. Treasury notes. Homeowners with adjustable-rate mortgages (ARM’s) or adjustable-rate home equity lines of credit, which are pegged to the prime rate, will see a more immediate change. A 0.25 percent rate hike means borrowers with a $50,000 home equity line of credit will see a $10 to $11 increase in their next monthly payment.
- Auto Loans – For those planning on purchasing a new car in the next few months, a rate increase likely will not have any material effect on what rate you get. Auto loan rates aren’t directly tied to the Fed’s benchmark rate, although the rate can be an influence. Bigger rate determinants include your credit score and whether you shop around for financing. A 0.25 percent rate hike means drivers taking out a $25,000 auto loan might pay an extra $3 per month.
- Savings – Bank’ terms allow them to be slower to raise rates on savings products than they are on loans and credit cards. Even with a Fed rate hike, banks may not pass any of that increase to customers. Getting a better yield on deposits may require shifting savings to a competitor.
- Student Loans – Federal student loan rates are fixed, so most borrowers won’t be affected immediately by a rate hike. If you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, the prime rate, or T-bill rates – which means that as the Fed raises rates, borrowers will likely pay more interest, although how much more will vary by the benchmark.
