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The Fed Raises Rates Again — Here’s What It Means for Your Savings, Mortgage and Credit

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The Federal Reserve board announced another rate hike today in a widely predicted move.  The new benchmark Federal Funds Rate has been raised to a target range of 1.5 percent to 1.75 percent.

What happens when the Fed raises rates?

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, savings accounts, auto loans, mortgage rates, and more.

Here’s a quick explainer:

Mortgage Rates

Rising rates do not bode well for homebuyers or homeowners looking to refinance. The higher your mortgage rate is, the more expensive it is to borrow and the less sense it makes for someone to refinance in order to lock in a lower rate.

“Higher rates are decreasing housing affordability and removing the incentive to refinance for millions of borrowers,” said Tendayi Kapfidze, chief mortgage economist at LendingTree, the parent company of MagnifyMoney. “They also add to the supply problem in the housing market as homeowners with low-fixed rates are less likely to put their homes on the market.”

If you are shopping for a new mortgage now, rising rates can easily make you feel pressured to move quickly. At a minimum, you should be comparing rates online and shopping with multiple lenders before making a final decision to ensure you’re getting the best rate possible.

If you are already in the loan shopping process and you’ve found a lender that you want, you might consider locking in your rate as soon as possible.
“If you are getting your first house, don’t drag your heels so that you can lock in the low rate right now,” said David Demming, CEO of Demming Financial Services in Aurora, Ohio.

Just make sure you time your rate lock right. Mortgage rate locks tend to expire after 30 or 45 days in most cases, and it can cost you dearly to pay the lender to extend the rate lock.

Ultimately, you can’t control mortgage rates and you shouldn’t let rising rates be the only reason you’re jumping into a mortgage application. But it’s wise to keep an eye toward the rate environment if you’re in the market for a new mortgage or refi, because it does have a potentially huge impact on your borrowing costs long term.

Home equity loans also get more expensive when mortgage rates rise.

Those who have a balance on a home equity line of credit, or HELOC loan, may want to make some aggressive payments now, advises Marguerita 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,” said Cheng.

Credit cards

Expect credit card debt to immediately become more expensive when the Fed raises rates, warns Kapfidze. Credit cards carry variable APRs that can fluctuate any time rates rise and fall.

“If the Fed follows through on 3 quarter-point rate hikes this year, consumers could be liable for almost $6 billion in extra credit card interest per year on $1 trillion in outstanding credit card debt, and over $15 billion compared to when the Fed started raising rates in late 2015,” Kapfidze said.

We may also see fewer banks roll out generous 0% balance transfer intro offers, or shorten the duration of these offers, he adds.

Credit card rewards could be at risk, too, in the long term. The higher rates get, the less profit credit card companies stand to gain from credit rewards.

“As transactors become less profitable, credit card issuers will start to think about how lucrative they want their rewards schemes to be,” Kapfidze said.

Savings and deposit accounts

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 a little bit more lucrative.

We’ve already seen banks, especially online lenders that typically offer higher rates than traditional brick-and-mortar banks, react swiftly to rising rates by hiking up rates on their deposit account products.

Expect that trend to continue, says Ken Tumin, editor of DepositAccounts.com, another LendingTree-owned site and one of the biggest deposit account comparison destinations on the web.

“If savers want to see the benefit of the Fed rate hikes, they would be wise to move their money from brick-and-mortar savings accounts to internet savings accounts,” Tumin told MagnifyMoney. “If savers prefer to stay with brick-and-mortar banks, they will likely see the most rate increases on shorter-term CDs.”

In 2017, we saw the largest rate increases on internet savings accounts and 1-year CDs, which saw yield increases of 26% year over year, according to Tumin.

Auto 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 percent.

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 said. “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

As the Fed looks to raise rates each quarter this year, you should think about your entire financial picture before letting rate behavior sway you in any one direction. 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.

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at [email protected]

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Federal Student Loan Rates to Ease Back Down for 2019-2020

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

After back-to-back increases in the previous two summers, interest rates for federal student loans are headed lower for the coming year.

Congress sets federal student loan rates each spring, based on the yield of the benchmark 10-year Treasury note, and the new interest rates go into effect on loans disbursed from July 1 onward.

While the Department of Education had yet to post the new rates on its site, news reports put the decreases for July 2019 to June 2020 as:

  • Undergraduate Direct Subsidized and Unsubsidized Loans: 4.53% (down from 5.05%)
  • Graduate Direct Unsubsidized Loans: 6.08% (down from 6.6%)
  • Graduate PLUS and Parent PLUS Loans: 7.08% (down from 7.6%)

Federal loan interest rates last declined in July 2016, with the undergraduate direct loans falling by about half a percentage point to 3.76%, for example.

Federal student loans also come with loan origination fees, but those generally change in October. For the 2018-19 period they were:

  • Undergraduate Direct Subsidized and Unsubsidized Loans: 1.062%
  • Graduate Direct Unsubsidized Loans: 1.062%
  • Graduate PLUS and Parent PLUS Loans: 4.248%

For more on the true costs of federal student loans, check out our complete guide, including all the various types of loans and strategies for repayment.

This report originally appeared on Student Loan Hero, which like MagnifyMoney, is part of LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

MagnifyMoney
MagnifyMoney |

Have a question to ask or a story to share? Contact the MagnifyMoney team at [email protected]

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