Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit will be most affected by a Fed rate hike.
With the Fed announcing another rate hike Wednesday, borrowing costs will head even higher for consumers. The good news is some bank customers will start to see noticeably higher savings rates.
Americans with credit cards, adjustable-rate mortgages and home equity lines of credit will see their monthly payments rise now that the Federal Reserve has lifted its key short-term interest rate by a quarter percentage point to a range of 1.75 percent to 2 percent.
All are revolving loans with variable rates that are directly affected by the Fed’s move.
Car buyers may feel it, too, though they’re still benefiting from a competitive auto loan market that’s keeping borrowing costs low. Any effect on 30-year mortgages and other long-term loans would likely be muted.
“While rising interest costs constrain borrowers … savers are finally getting their day in the sun,” says Greg McBride, chief economist of Bankrate.com.
The rate hike Wednesday becomes the second this year and the seventh since the Fed began bumping them up in late 2015. Two more hikes are now expected in 2018.
Here’s how the moves could affect consumers:
Credit cards, HELOCS, adjustable-rate mortgages
These loans will become more expensive within weeks since their rates are generally tied to the prime rate, which in turn is affected by the Fed’s benchmark rate.
Average credit-card rates are 17 percent, according to Bankrate.com. For a $10,000 credit-card balance, a quarter-point hike is likely to add $25 a month in interest, according to Steve Rick, chief economist of CUNA Mutual Group.
Four rate increases this year could mean an additional $100 in monthly interest. LendingClub advises people to consolidate their credit-card debt with a personal loan.
Rates for home equity lines of credit are much lower at 5.92 percent. A quarter-point increase on a $30,000 credit line raises the minimum monthly payment by just $6 a month.
By contrast, rates on adjustable-rate mortgages are modified annually. So the impact may be delayed, but then it could bite. Four quarter-point hikes in 2018 likely would boost the monthly payment on a $200,000 mortgage by $84 to $112.
The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly. Those rates correlate more closely with inflation expectations and the long-term economic outlook.
The average 30-year fixed mortgage rate already has climbed from 4.15 percent to 4.54 percent since Jan. 1 largely because investors expect federal tax cuts and spending increases to push inflation higher. But the rate is down from a recent high of 4.66 percent in late May. The likely rate hike on Wednesday is already figured into mortgage rates.
For home buyers, any impact on the monthly bill would probably be relatively small. By year’s end, a quarter-point rate increase on a $200,000 mortgage would boost the monthly payment by about $30.
Existing fixed-rate mortgages are not affected.
Other Fed moves could also play a role. In September, the Fed announced that it’s gradually shrinking the bond portfolio it amassed during and after the financial crisis in a bid to lower long-term rates. That likely has a greater effect on fixed mortgage rates, according to Tendayi Kapfidze, chief economist of LendingTree.
A quarter-point rate hike theoretically would get passed on to new auto loans, increasing the monthly payment for a new $25,000 car by $3. Existing loans would be unchanged. But competition among lenders is holding down auto loan rates, McBride says. That could mean an even smaller monthly increase. Five-year auto loan rates are currently at 4.71 percent.
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 the deposits customers make.
Don’t expect a fast or equivalent rise in your savings accounts or CD rates, many of which pay interest of 1% or less. Those rates have barely budged the past year despite the Fed’s hikes.
Low rates on loans have meant narrow profit margins for banks for years. They can now benefit from a bigger margin between what they pay customers in interest and what they earn from loans, McBride says. And since they’re still flush with deposits, they don’t need to attract more to make loans.
Yet a handful of online and community banks, credit unions and money market mutual funds that are hungrier for deposits are paying as much as 2.5 percent on a one-year CD, up from 2.15 percent in March. Fed rate hikes this year should help boost the top rate to 2.8 percent to 3.1 percent by December, McBride says.
And top savings and money-market rates are nearing 2 percent. That’s about the rate of annual inflation. “Being able to earn more than inflation is something savers haven’t seen in a decade,” McBride says.
USA TODAY’s Adam Shell tells us what to expect following the increase in interest rates on March 21.
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