The central bank has raised its target federal funds rate off of zero for the first time since 2006. While it may be a small increase, it could have a trickledown effect on your bank account, 401(k), adjustable-rate mortgage loan and even your credit card.
The Fed’s decision to edge off of a crisis-level rate policy has largely been anticipated and experts say the first rate hike in nearly a decade might not have much of an impact overall. But if you’re concerned about what this means for your own finances, here is a breakdown and what you can expect.
The Fed has little influence over long-term, fixed-mortgage rates, which are pegged to yields on U.S. Treasury notes, so don’t expect higher mortgage rates to weigh on your ability to buy a home or refinance in the near future. But with interest rates rising, adjustable rate mortgages could be heading higher, too — so don’t be surprised to see some payment increases down the road if you have an adjustable mortgage.
“You will get a notice that your payment is going to change, typically about 45 days out, but you need to be thinking further ahead of that,” advised Bankrate.com Chief Financial Analyst Greg McBride. “Now is a great time to refinance out of an adjustable rate mortgage and lock in a low fixed rate.”Currently, mortgage rates are near the lowest levels ever with the average 30-year fixed standing around 4 percent — only half a percentage point above the record low.
For those planning on purchasing a new vehicle in the year ahead, interest rate increases are not going to have any material effect on your ability to buy a car. A quarter-percentage point difference on a $25,000 loan is $3 a month.
However, this is a good reminder to car shoppers to find the best financing offer before you buy. It often pays to shop around online and line up a loan before you head to the dealership.
Credit card rates are predominantly pegged to the federal funds rate and will rise in step with interest rate increases. APRs are variable rates, which means they are tied to the benchmark rate, and if that rate rises, you could also see your rate increase — typically in one to two credit card cycles without any advance notice.
So, grab those zero-, or low-rate, balance transfer offers while you still can to pay off or pay down your debt. If rates continue to rise, those offers will most likely become less generous.
Stashing some cash in a savings account has yielded nearly nothing for years, aside from peace of mind, and that’s not likely to change much.
The average rate on a savings account is 0.08 percent, according to Bankrate.com — less than the rate of inflation. Even with a Fed rate hike, banks may not pass on any of that increase to their customers, which means the interest on deposits will remain near rock bottom.
Federal student loans with a fixed interest rate won’t be impacted by a rate hike. But if you have a private loan with a variable rate, that rate is likely to rise, which means so will the interest you pay on the principal of the loan.
Still, “there is nothing to freak out about,” noted Max Spiegel, chief operating officer Student Loan Hero, a student-loan management site. “There will likely be some gradual increases over time but the initial increase will be very nominal so it’s not going to hit your pocket that much, that’s the bottom line,” he said. If you have private loans with variable rates — and you are worried about it — it’s not too late to refinance into a fixed-rate loan and lock in a low rate. Even a loan that’s already been refinanced can be refinanced back to a fixed-rate loan, Spiegel said.
Bond funds are a big part of many 401(k) plans, and there’s likely to be some volatility there in the short term since bond prices fall when rates rise.
However, the higher coupons will ultimately deliver higher returns if investors can look past the short term move and hold on.
For the 401(k) investor, it’s important to look at the big picture, if the Fed is raising rates, it’s a sign of a healthy economy and that’s ultimately good news. Maintain that long-term perspective.