How the Fed’s Interest Rate Hike Could Impact Your Finances

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It’s widely expected that the Fed will raise interest rates this month, but we won’t know for sure until they meet December 13 and 14. The last time the Federal Reserve raised its benchmark interest rate was a year ago, when it voted to raise the rate from .25% to .5%.

Why should we care?

Consumers should be aware of the rate hike for a simple reason: Lenders and banks base their interest rates on the federal funds rate, so when the benchmark increases or decreases, it can impact rates on products like credit cards, auto loans, mortgage rates, and more.

So, what could change for you?

Mortgage Rates

Cheryl Young, a chief economist at Trulia, says homebuyers don’t need to be terribly worried about an increase in the federal funds rate.

“Don’t rush into a home purchase decision because you think that rates are going to go up,” said Young. “Make sure to take your time and don’t get driven into a hasty decision based on what may or may not happen with rates.”

A Trulia report released Wednesday shows homebuyers are more concerned about saving for a downpayment than rising mortgage rates. Young  says if you are renting and thinking about buying, for the majority of market, buying still makes more financial sense. In fact, mortgage rates would have to double in order to make renting more affordable on the whole.

Existing homeowners and people who are preparing to buy a home soon should take the opportunity to lock in today’s low rates before they rise, says David Demming, CEO of Demming Financial Services in Aurora, Ohio.

Buy when things are cheap,” said DemmingIf you are getting your first house, don’t drag your heels, so that you can lock in the low rate right now. Some lenders will give you a 10-year fixed rate and you should take advantage of those.”

Those who have a balance on a home equity line of credit, or HELOC loan, may want to make some aggressive payments now, warns Margarita Cheng, the CEO of Blue Ocean Global Wealth in Rockville, Md.

“When the prime rate goes up, the interest rate on a home equity line of credit will float up,” says Cheng.

Credit and Savings

“The costs for the credit card lender increases when the benchmark rates go up, so they are then tempted to raise rates on short term loans like credit cards,” says Chris Chen, Wealth Strategist at Insight Financial Strategists in Waltham, Mass.

There is some good news, although it may not be what you wanted to hear. The interest rates on credit cards are already high — currently 15% on average. Even if the Fed raises rates by another .25%, credit card users likely won’t notice.

For savers, however, a rate hike could be good news. You might start to earn more on the cash you have stashed in savings accounts, Money Market funds and CDs. Rates on these products are much lower than prior to the recession but a fed rate hike might make them “just a teeny bit less unattractive,” says Chen.

Car Loans

Car loans are one of those short-term loans you can expect to be influenced by a rise in the funds rate, but borrowers likely won’t feel much of a sting.

To get the best rate on a car loan, you should shop around for a low rate first, then make sure to negotiate the price of the vehicle. Interest rates on car loans are fixed, so if you do that, you’ll be set for a while. Heads up: the current average rate on a 60-month auto loan for a new car is 4.27%.

Investments

Bonds react inversely to the federal funds rate. When interest rates go up, the price of a bond goes down.

“To what degree, we don’t know,” Cheng says. “But that’s why it’s important to be prepared and have diversified investments.”

Don’t panic just because some of your bonds could lose value, adds Kristi Sullivan, the CEO of Sullivan Financial Planning. It’s all part of the cycle.

The Bottom Line

Whether or not the Fed’s December meeting results in an increased funds rate, you should think about your entire financial picture. The general expectation is that rates will continue to increase as the economy strengthens. Keep an eye on your interest rates and maintain a diverse portfolio and you should be prepared for whatever happens.

 

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