If you've been following news in the economic world, you know that last month the Federal Reserve moved on the decision to raise the federal funds rate for the first time in 2017 and the third time since December 2015. While their decision reflects an improving economy, there are a few ways the rate increase affects you as a consumer.
Credit Card Interest Rates
A large majority of credit cards have a variable APR rate, which is tied to the prime rate. This means that shortly after the federal funds rate is increased your variable credit card interest rates will follow suit.
Millions of Americans carry a monthly balance on credit cards. According to a WalletHub analysis, this rate hike will cost balance-carrying consumers approximately $1.6 billion in extra finance charges in 2017.
Home Equity Loan Rates
If you already have a home equity loan, your rate is likely fixed so you won't feel any pressure from a federal funds rate hike. On the other hand, if you plan to shop for a home equity loan in the future, interest rates will continue to gradually increase.
As for home equity lines of credit (HELOC), their interest rate tracks the prime rate so you are likely to see an almost immediate increase. If your interest rate on your HELOC is variable, it may be a good time to talk to your banker about a change to a fixed rate.
Buying or Refinancing a Home
First and foremost, homebuyers and homeowners have been enjoying mortgage rates near historic lows for the past few years but rates have been on the rise over the past 6 months.
Mortgage rates aren’t directly tied to the federal funds rate. When the first rate hike occurred in December 2016, the 30-year fixed mortgage rate actually dropped.
When the fed funds rate is bumped, rates on adjustable-rate mortgages react first.
For example, if you bought a $200,000 home with a 10% down payment on a 30 year fixed-rate mortgage at a 4% interest rate, your house payment excluding taxes, insurance and private mortgage insurance would be approximately $860/month.
A bump of 0.5% in your interest rate would raise your principal and interest payment to approximately $912/month. A jump in mortgage rates could not only decrease mortgage affordability but also shut some potential buyers out of the housing market completely. Therefore, if you’ve been planning to shop for a home, it’s better to do so sooner rather than later.
Your Retirement Plan
If an annuity is a part of your retirement plan, you could see a small increase from the federal funds rate hikes, granted you have a variable rate annuity. If you have a fixed annuity, your monthly income is locked in from when the annuity was purchased.
Buying a Car
Before the Federal Reserve started increasing the federal funds target rate, auto loan rates were near historic lows. While there is no direct correlation between the federal funds rate and auto loan rates, they're likely to follow suit with the increase of other loan rates.
Luckily, a small increase in auto loan rates minimally impacts car affordability for most U.S. consumers.
Student Loan Rates
If you have a federal student loan or a private student loan with a fixed-rate, you won't see a change in your payment amounts. But if you have a variable-rate private student loan, your rate is determined by market interest rates, which is impacted by Fed rate increases. How often your rate adjusts depends on your loan terms.
Your Savings Plan
A change in short-term rates could result in increased returns for savers with CD’s, money market accounts or savings accounts. When the Fed pushed rates down, your interest accrual was likely very minimal. When the federal funds rate is pushed up, you can expect to see a small increase in your savings return. According to Bankrate, today’s top-yielding nationwide savings accounts yield 1.0 to 1.25%. If the Fed boosts rates by 0.75% this year, Bankrate estimates yields will increase to 1.75 to 2.0%.
The above categories are just some of the ways the federal funds rate hike may affect you. While some of the affected areas will see changes rather quickly, others will have a trickle-down effect. Regardless, an increase in the federal funds rate means that the economy is making strides to normalcy.
Overall, if you've been considering buying a home or refinancing to reap the benefits of historically lower mortgage rates, it would be better to do so sooner than later.
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