Today’s Money Mondays segment focuses on interest rates.
The Federal Reserve’s Federal Open Market Committee will meet this week, and most of the people that follow it believe that the Committee will raise interest rates. This is something we have been expecting for some time, but it looks more certain now with unemployment falling to just 4.6% in November, continued wage growth, and inflation finally picking up. So, this morning, I want to talk a little bit about how an interest rate hike might impact our listeners.
Let’s start out with mortgages. What can we expect on that front?
As many people know, mortgage rates are still very low, with the average fixed interest rate on a home loan coming in at 4.13%. Because long-term fixed interest mortgages are pegged to the yields on Treasury notes, and because we are seeing a moderate increase in inflation, we can also expect to see the rates we pay on mortgages rise, which will make buying a house more expensive. And if you have an adjustable interest rate on your mortgage, you may see your mortgage payments go up soon, so you will want to start budgeting for that, or better yet, try to refinance your house now to get a fixed rate home loan.
Just last week we talked about auto loans. How will this rate hike impact those?
If you are currently looking at purchasing a car, don’t worry too much about the Fed raising interest rates. The reason for this good news in that a single rate increase is unlikely to have any significant effect on borrowing costs. For example, a quarter percentage point difference on a $25,000 loan is $3 a month. That said, I want to reminder our listeners about what we talked about last week. No matter the interest rate, if you cannot pay off the car in 5 years or less, you should avoid getting a new car.
We won’t see a big change to auto loans. Where will an interest rate hike be most apparent?
The two financial tools that will be immediately impacted by a rate hike are credit cards and student loans. Let’s start with credit cards. Most credit cards that Americans current hold have a variable rate. This means that the interest rate on these cares is directly tied to the benchmark rate that the Federal Reserve determines. That means if we see a rate hike of a quarter of a percent, as expected, within a short time you will likely see your credit card’s interest rate rise a quarter of a percent. As a result, it will make it a little more expensive to pay off your credit card.
The same is true with private student loans. While federal student loan rates are fixed, many private loans have variable rates. So, if you have a private loan, it is likely the interest rate on your loan will go up if the FOMC decides to raise the benchmark rate as expected. However, unlike your credit card rates, the rate increase on your loan will be more gradual, which may allow you to refinance the loan to a fixed rate if the rate increase is too much.
Is an interest rate hike only negative for us, financially? Will our savings account see benefits from a rate hike?
Unfortunately, I would not count on this rate hike to bring significant advantages to your savings accounts. The average interest rate on a savings account is less than 0.10 percent right now, and even with a Fed rate hike, you can expect many banks to be very slow to pass the increase along to you, if they do at all. In sum, expect that interest rates on bank accounts will remain at record lows. The good news is that the markets have long prepared for this rate hike, pricing it in, and the market continues to see strong growth. So, while a rate hike is not going to bring much change to your savings, your retirement investments are seeing strong growth.