5 Ways the Interest Rate Hike Could Affect You – TheTradersWire

5 Ways the Interest Rate Hike Could Affect You


5 Ways the Interest Rate Hike Could Affect You

By Sarah Chandler | May 13, 2017 — 6:00 AM EDT

It’s official. In December 2016 and then in March 2017, the Fed – you know, that illustrious American institution officially known as the Federal Reserve – imposed two benchmark interest rate hikes. (For more, see The Impact of the Fed Interest Rate Hike.)

The first rate hike amounted to only a quarter of a percent, from a range of 0.25% to 0.50% to a range of 0.50% to 0.75%. The second was another quarter point to 0.75% to 1%. Predictions from financial experts are now mixed about whether to expect the two more hikes that were originally predicted for the balance of 2017.

The Interest Rate Hike: A Good Thing?

Such an increase can be interpreted as a positive sign about the brisk growth of the U.S. economy, as officials at the Fed would likely not take such an action during a slide into recession. After all, when the American economy hit bottom in the Great Recession, interest rates were cut to zero for the first time in history.

What does this mean for American workers and consumers? While this kind of increase may not seem dramatic, it’s the cumulative impact over several areas of your financial life that you’ll want to consider.

Your Savings

If you have zero debts and aren’t in the market to buy a new home, you might expect that an interest rate hike promises good news for your savings account. Unfortunately, savings interest rates, currently at rock bottom levels of 0.11%, are not expected to rise. Check online savings accounts and credit unions, which may be quicker to extend the Fed’s higher interest rate to their customers.

Your Credit Cards

Credit cards are by nature fickle beasts, with adjustable rates that vary on the market’s ups and downs. While it may seem easy to do the math on how this rate hike impacts consumer debt, the long-term impact may be greater than consumers initially expect. After all, it doesn’t sound too bad to pay an extra $5.00 a year on every $100 you carry in credit card debt because of these two rate increases. Yet for a consumer who owes $10,000, that pocket change quickly turns into a yearly $500 increase, and that isn’t chump change. For many Americans it may be time to write, “Pay off credit cards” at the top of their list of New Year’s resolutions.

Your Mortgage

If you have an adjustable-rate mortgage (ARM), you may have long been dreading an interest rate increase. Rather than allowing your mortgage rate and anxiety levels to be subject to market fluctuations, it might be a great time to think about refinancing: Average fixed-rate loans are currently sitting at just over 4% for typical 30-year mortgages. Converting to a fixed-rate option may be especially appealing to homeowners with home equity lines of credit (HELOCs), who can expect to see immediate increases in their monthly bills.

Your Student Loans

We’ve already just learned that the interest rate on federal student loans will likely rise, starting July 1, 2017 through June 30, 2018. The Department of Education hasn’t announced the new rates yet, but they’re tied to the May 10-year Treasury auction, which closed on May 10. Undergraduate loans will rise to 4.45% from 3.76%; grad students go to 6% fo ra direct unsubsidized loan from 5.31. Direct PLUS loans, used by both grad students and parents, will increase to 7% from 6.31%. An Introduction to Student Loans and the FAFSA will get you started on understanding this program.

The federal government carries more than 90% of student loan debt, which adds up to nearly $1.4 trillion. To put that number in perspective, it’s roughly the same as the gross domestic product of South Korea, one of the world’s most prosperous nations.

Fortunately, the rate hike actually won’t impact most Americans who currently carry student loans. That’s because federally backed student loans are fixed-rate ones. Of course, if you’re matriculating at Princeton in September 2017 and plan to borrow money to cover the yearly $45,320 tuition, your future loans will fall into the new interest rate territory. If you carry adjustable-rate private student loans, you may want to refinance to avoid possible multiple rate hikes over the next few years. (For more, see Student Loan Debt: What Every Borrower Should Know.)

Your Car Loan

If you’ve decided that 2017 is the perfect time to spring for that new car you’ve been eyeing, don’t fret. This rate hike won’t kill your dream, whether you favor Ferraris or Fords. A half-point increase amounts to not that many dollars a month – about the price of a couple of cappuccinos – on an average car loan, which currently clocks in at around $30,000. These days most five-year loans hover at just under 5% annual interest, while interest rates on four-year loans are currently at just over 4%.

The Bottom Line

The Fed’s interest rate hike may be a sign that the economy is finally growing well – and that’s a good thing. However, if you fall into the camp of those with multiple debts, from mortgages to car loans to college debt, as many Americans do, pay close attention to the impact it might have on your financial well-being across several categories.
Published at Sat, 13 May 2017 10:00:00 +0000

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