What The Recent Tax Interest Rate Hike Means For You
This week the experts at Kima Commercial are eager to give you the scoop on the Federal Reserve’s most recent interest rate hike and how it might affect you.
The Federal Reserve’s recent decision to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.
Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike.
These interest rate hikes could add up to hundreds of dollars per month in extra fees for credit card, adjustable-rate mortgage and HELOC borrowers.
The Fed’s likely decision to lift the federal funds rate, which is what banks charge each other for overnight loans, will have several effects on consumers. Here’s how it may impact mortgage rates, auto loans, credit cards and bank savings rates.
The Fed’s key short-term rate affects mortgages and other long-term rates only indirectly.
Thirty-year fixed mortgage rates hit a 2017 high last week as the average jumped to 4.21% in anticipation of the Fed’s move Wednesday and another similar hike. That is up from a year ago when the average 30-year mortgage rate was 3.68%, according to Freddie Mac.
For consumers currently shopping for a mortgage to purchase a property or refinance an existing loan, a Fed rate hike “shouldn’t feel like a real shock to the system since the rate move has already been ‘baked’ into the market.
A third hike later this year could boost the rate by as much as another quarter-point or so, increasing the monthly mortgage payment on a $200,000 home by up to $30.
Adjustable-rate mortgages, by contrast, typically are modified annually.
Borrowers with adjustable rate mortgages that are seeing their rates reset should brace for higher payments. Because most ARMs only adjust once per year, the next rate reset could be a doozy if it encompasses 2 or 3 Fed hikes in the interim.
Adjustable rates, he says, could rise about three-quarters of a percentage point in that period, increasing the monthly payment of the $200,000 mortgage by $84.
Other factors may loom large in addition to future Fed rate hikes that will determine the direction of mortgage rates moving forward. If Congress fails to approve President Trump’s fiscal stimulus, for example, long-term rates could fall regardless of the Fed, while a faster-growing economy and higher inflation could drive up borrowing costs faster.
Typical five-year auto loans will be more directly influenced by a quarter-point increase in the Fed’s key short-term rate, with a 4.25% car loan rate rising by a similar quarter-point, or $3 a month.
An increase Wednesday’ and two similar interest rate increases this year would increase the monthly payment for a new $25,000 car by a total of $9.
Credit Cards and Home Equity Lines of Credit
Revolving loans with variable rates, such as credit cards and home equity lines of credit, will become more expensive since they feel the most immediate impact from an increase in the Fed’s key short-term rate.
Average credit card rates are about 16.26%, while home equity lines are about 5.21%, according to Bankrate.com.
Banks should pass along quarter-point increases in the federal funds rate to those consumer rates within weeks.
Bank Savings Rates
Since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on customer deposits. Don’t expect a fast or an equivalent rise in your savings accounts or CD rate though.
Low interest rates have spelled narrow profit margins for banks for years. They have an opportunity to benefit from a bigger margin between what they pay in interest and what they earn from loans.
NerdWallet credit and banking analyst Sean McQuay advises you should search for a higher-yield savings account.
A high-yield savings account pays about $275 more per year than a low-interest account on savings of $25,000, according to NerdWallet.