The central bank is widely expected to raise its federal funds rate a quarter-point at the conclusion of its two-day meeting on Wednesday.That would make it the Federal Reserve Board’s second increase in a decade — and will change some of the terms by which you borrow, at least in the longer run.
“As long as the economy continues to progress, we will see more from the Fed and the cumulative effect is really meaningful,” said Greg McBride, Bankrate.com’s chief financial analyst.
If you’re concerned about what this means for your own bank account, mortgage loan or credit card, here’s a breakdown of what may happen.
The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there’s already been some creep up from record-low levels since the election and well before the Fed makes an official move.
With interest rates rising, adjustable rate mortgages will certainly be heading higher too and those with an ARM “are a sitting duck for a big increase,” McBride said.
One option to consider is refinancing.
“There is no sense in bearing the risk of an adjustable rate when you can lock in a fixed-rate and essentially the same level,” he said. The average 30-year fixed rate mortgage is about 4.15 percent — not all that far off from the record low of 3.50 percent.
Many homeowners with adjustable rate home equity lines of credit,which are pegged to the prime rate, will also be affected. But unlike an adjustable rate mortgage, these loans adjust immediately rather than once a year.
For example, a rate increase of 25 basis points would cause borrowers with a $50,000 HELOC to see a $10 to $11 increase in their next monthly payment, according to Mike Kinane, a senior vice president of consumer lending at TD Bank. While that’s not a big change, those worried about the escalation of rates can often convert the balance into a fixed-rate option at any time, Kinane said.
For those planning on purchasing a new car in the next few months, one rate change likely will not have any material effect on what rate you get. A quarter percentage point difference on a $25,000 loan is $3 a month, according to Bankrate’s McBride. “Nobody is going to have to downsize from the SUV to the compact because of rates going up,” he said.
What will affect what kind of car you can afford is checking that yourcredit is in good shape, negotiating the price of your vehicle and shopping around to secure the best rate on your financing. “Don’t lose sleep over interest rates,” he said.
The average 5-year new car loan rate is 4.27 percent and the average 4-year used car loan rate is 4.89 percent.
Most credit cards these days have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate. For example, a quarter percentage point rate hike means you’ll pay an extra $25 a year for every $1,000 of debt, according to NerdWallet.
The Fed’s next increase is expected to raise the amount the average household pays in credit card interest to $1,309 from $1,292 a year, NerdWallet said (assuming the average credit card APR of 18.76 percent).
While a $17 increase doesn’t seem like an emergency situation ,”these rates are expected to continue to rise, and each change adds up and increases your debt burden,” said Sean McQuay, Nerdwallet’s credit card associate. However, there’s still time to consider a zero interest balance transfer offer and make aggressive steps toward paying down your high-interest debt once and for all.
Stashing some cash in a savings account has yielded not very much, aside from peace of mind, and that’s not likely to change. The average interest rate on a savings account is about 0.11 percent right now, according to Bankrate, and even with a Fed rate hike, banks may not pass on any of that increase to their customers, which means interest on deposits will remain near rock bottom.
Banks’ terms allow them to be slower to raise rates on savings products than they are on loans and credit cards, according to Nick Clements, co-founder of MagnifyMoney.com.
Rather, “check online savings accounts, community banks or credit unions, often you can pick up an additional full percentage point that way,” McBride said.
Federal student loan rates are fixed, so most borrowers won’t be impacted by a rate hike. But if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates — which means that if the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
“If the federal funds rate rises by 25 basis points, one can expect the interest rates on variable loans would increase by the same amount,” said Stephen Dash, the CEO of Credible.com, an online marketplace for lenders that offer student loan refinancing.
While most borrowers have Federal student loans, many others have a mix of federal and private loans and nearly a quarter, or 24 percent, of student loan borrowers don’t know the difference, according to Credible.
That makes this a particularly good time identify the loans you’ve got and see if refinancing into a fixed rate makes sense, Dash said. “There still exists a very meaningful savings opportunity.”