The FED decision to increase short-term interest rate by a 0.25% point is expected to have an effect across the economy as it slowly pushes up any kind of rates from mortgages and credit card rates to small business loans.
Consumers with adjustable-rate mortgages, home equity lines of credit, credit card debt would expect increased interest rates. According to Greg McBride, chief analyst at Bankrate.com, quoted by USAToday:
“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 Federal Reserve’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.
Effect On Mortgages
Any increase of the key short-term interest rate by the Fed will affects mortgages and other long-term rates only indirectly.
30-year fixed mortgage rates have already hit their highest for 2017 last week as the average went up to 4.21%. That is up from a year ago when the average 30-year mortgage rate was 3.68%, according to Freddie Mac.
According to mortgage analyst Tim Manni from NerdWallet consumers who are about to shop for a mortgage to purchase a property or refinance an existing loan shouldn’t be surprised as the interest rate increase has already been “baked into the market”.
Another increase in 2017 could boost the rate by as much as another 0.25% which means an increase of any monthly mortgage payment on a $200,000 home by no more that $30. The adjustable-rate mortgages typically are modified annually.
According to Mr. McBride “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 could rise about 0.75% of a percentage point in that period, increasing the monthly payment of the $200,000 mortgage by $84.
Other factors that would affect mortgage rates are related to the Congress’s decision to either approve or disapprove the President Trump’s fiscal stimulus. If Congress disapproves it, it is expected that the long-term rates could fall regardless of the Fed, while a faster-growing economy and higher inflation could drive up borrowing costs faster.
Effect On Auto Loans
The 5-year auto loans will be more directly influenced by a 0.25% increase in the Fed’s key short-term rate, with a 4.25% car loan rate rising by a similar 0.25%, which would be around $3 a month. If there are three interest rate increases in 2017, those with auto loans would expect to a $9 increase on the monthly payment for a new car that costs $25,000.
Effect On Credit Cards & Home Equity Lines Of Credit
Revolving loans with variable rates, such as home equity lines of credit and credit cards are expected to become more expensive. Bankrate.com says that the average credit card rates are about 16.26%, while home equity lines vary around 5.21%.
Banks should pass along 0.25% increases in the federal funds rate to those consumer rates within weeks.
Effect On Bank Savings Rates
The banks will be able to charge a bit more for loans. They would start paying a little bit more on customer savings accounts. However, Americans would not expect a fast or an equivalent rise in the interest rate they earn.
Low interest rates have spelled narrow profit margins for banks for years. No banks have an opportunity to benefit from a bigger margin between what they pay in interest and their earnings from loans. The consumers are advised to search for a higher-yield savings account.
Sean McQuay of credit and banking analyst NerdWallet says that “saving in a high-yield versus low-yield account would earn Americans $5.6 billion more per year in savings account interest”. A high-yield savings account pays about $275 more per year than a low-interest account on savings of $25,000.