If you've been following news in the economic world, you know that the Federal Reserve has been talking of increasing interest rates for the first time in nearly seven years. Most recently, the Fed said in a post-meeting statement that due to the gains in the labor market, economic activity and inflation, conditions could warrant a December rate hike. But how does it affect you as a U.S. consumer?
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Buying or Refinancing a Home
First and foremost, homebuyers and homeowners have been enjoying mortgage rates near historic lows for the past few years. When the federal funds rate is bumped, rates on adjustable-rate mortgages will 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. Therefore, a jump in mortgage rates could not only decrease mortgage affordability but shut some potential buyers out of the housing market completely.
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. The good news is that if you carry a month-to-month balance the new interest rate will only apply to purchases made after the increase.
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 gradually increase.
As for home equity lines of credit (HELOC), their interest rate tracks the prime rate so you are likely to see 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.
Planning Overseas Travel
Dreaming of a European vacation? An increase in the federal funds rate will likely cause foreign investment to increase in the U.S. and strengthen the U.S. dollar against other countries' currencies, meaning increased affordability in foreign countries for U.S. travelers.
Your Retirement Plan
If an annuity is a part of your retirement plan, you could see a small increase from a federal funds rate hike, 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
Auto loan rates have also been near historic lows and while there is no direct correlation between the federal funds rate and auto loan interest 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 will be impacted by a federal funds rate increase. 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 CDS, money market accounts or savings accounts. When the Fed pushed rates down, you probably felt a small dip in your savings account. When the federal funds rate is pushed back up, you can expect to see a gradual increase in your savings return.
The above categories are just some of the ways the federal funds rate hike may affect you. The impact would depend on how quickly rates are increased, but so far the Fed has said the rate hike would be slow and over a long period of time.
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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