USA TODAY International Edition
Your loan payments will soon get higher
Federal Reserve raises interest rates by a quarter point for second time this year
Credit card users, home- equity borrowers and homeowners with adjustable- rate mortgages will likely see their monthly payments rise as the Federal Reserve’s interest rate hike Wednesday ripples across the economy.
All of those revolving loans have variable rates that go up or down based on the Fed’s benchmark short- term rate, which it raised by a quarter percentage point.
“If you’ve got variable- rate debt, it could make sense to speed up those payments or refinance that debt to a fixed- rate loan,” says Liz Weston, a certified finan- cial planner based in the Los Angeles area.
For consumers with 30- year mortgages and other longer- term loans, the effect of the Fed’s move on their pocketbooks will be far more gradual. But the central bank’s plan, announced Wednesday, to gradually reduce the size of its $ 4.5 trillion balance sheet, is also likely to nudge up mortgage rates over time as the assets flood the market, lowering their prices and increasing their rates.
Car buyers may be affected, too, though they’re now benefiting from a highly competitive market for auto loans that’s keeping borrowing costs low.
The Fed lifted its federal funds rate — which is what banks charge each other for overnight loans — by a quarter percentage point to a range of 1% to 1.25% following a similar March hike. A third quarter- point increase in 2017 is still expected later this year. Here’s how the moves could affect consumers: u Credit cards, HELOCS, adjustable- rate mortgages: These loans will become more expensive since their rates are directly linked to the prime rate, which is affected by the Fed’s key rate, says Steve Rick, chief economist of CUNA Mutual Group.
Average credit card rates are 15.07%, according to Bankrate. com. For a $ 5,000 credit card balance, a quarter- point hike is likely to add about $ 175 in total interest, says Bankrate Chief Economist Greg McBride. But with the Fed set to bump up rates three times a year through 2019, that could mean the addition of $ 525 in total interest annually.
Meanwhile, rates for home- equity lines of credit are considerably lower at about 5%. A quarter- point increase on a $ 30,000 credit line raises the minimum monthly payment by just $ 6 a month, McBride says. Three hikes this year would mean an $ 18 rise in the monthly tab.
By contrast, rates on adjustable- rate mortgages are modified annually. So the impact may be delayed, but it could hurt. Three quarter- point hikes in 2017 likely would boost the monthly payment on a $ 200,000 mortgage by $ 84. uFixed- rate mortgages: The Fed’s key short- term rate affects 30- year mortgages and other long- term rates only indirectly.
Thirty- year mortgage rates reached a 2017 high of 4.3% in March but have retreated to 3.9%. Three rate increases in 2017 could raise mortgage rates by about a quarter percentage point, Duncan says, boosting the monthly payment on a $ 200,000 mortgage by about $ 30.
u Auto loans: Three rate hikes this year theoretically would increase the monthly payment for a new $ 25,000 car by a total of $ 9. But McBride says, “Competition among lenders is minimizing the increases on auto loan rates. ... There will be plenty of lenders that will hold rates steady.” Auto loan rates average about 4.4%. u 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. Yet don’t expect a fast or an equivalent rise in your savings accounts or CD rates, many of which pay interest of 1% or less.