The Federal Reserve’s June rate hike was well forecast and shouldn’t surprise anyone. The new range is 1 percent to 1.25 percent compared to the previous 0.91 percent. The funds rate projection for the end of 2017 remains 1.4 percent, which indicates an additional hike before the end of the year. The repercussions will flow through the consumer market for the remainder of 2017 and into 2018 (possibly into 2019). Not only variable rate mortgages and new mortgages will be affected. Although a quarter point increase is small (and typical), it does increase costs for almost everyone borrowing money, accessing credit, paying on many existing loans, and qualifying for a new mortgage.
Granted that the federal rate increases are moving slowly but they are beginning to accelerate. In regards to investors and consumers, it follows the analogy of how to boil a frog without it jumping out of the pot. You continue raising the water temperature slowly but steadily so that the frog doesn’t realize it is starting to boil. Each incremental rate increase affects bank accounts, mortgage loans, existing credit card debt, and almost all future debt.
A quartet point increase will only amount to an extra $2.50 in annual interest for every $1,000 of variable rate credit card debt (by far, most credit card debt is variable). However, that grows to $25 on a $10,000 debt and $75 for $30,000. Then start multiplying it towards multiple cards and it becomes real money. Rolling in the three previous rate hikes finds credit card users paying about $6 billion in additional interest for 2017. That’s interest only, without additional economic spending to grow the economy.
Big ticket credit purchases will become more expensive almost immediately. This includes purchases already made with adjustable rate home equity lines of credit (HELOC). These are mostly pegged to the prime rate. Existing HELOC loan payments increase almost immediately. Those with a $50,000 loan can expect a $10 or $11 increase in their monthly bill during the next month or two. People with adjustable-rate mortgages will see an increase within a year. Of course, new fixed rate mortgages are going up as well.
Those with HELOCs and adjustable rate mortgages should be looking into what options they have to lock these into fixed rate loans while rates remain near the low 4 percent level. People soon closing on a new fixed rate mortgage should consider locking in current low rates.
Federal student loans have a fixed interest rate. Those with an existing loan should not see any change in payments. Students taking out new loans will see an increase over time and those with private loans need to look at the details of their individual loans that may have a variable rate. It’s estimated that almost one quarter of people with student loans don’t even understand the difference between a fixed or variable rate loan – to say nothing about which one they have.
Car loans should not materially affect the finances of most people. A $25,000 car loan falls in line with what many people are carrying on credit card debt. However, most car loans have a relatively low interest rate of 5 percent or less.
Those with cash savings (savings accounts, CDs, and money market accounts) should not expect the rate increase to be reflected in their rate of return. Many accounts are still paying less than one percent and most banks aren’t likely to pass much of the interest rate increase onto saving accounts. About the only thing you can do is check online for the rare accounts paying as much as a full percentage point higher than you might be getting now. Of course, you need to read the fine print to understand restrictions that apply.
The fed rate increase doesn’t only affect the interest rate investors and consumers will be paying for new loans. Accumulatively, it raises the always important debt-to-income ratio that is calculated based on payments for rent, mortgage, credit cards, or other debt. The Federal Reserve has already forecast additional rate increases. Now is a good time to review loans that you are paying on to identify opportunities to refinance into fixed rate loans before further increases are implemented.
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