Yesterday, the Federal Reserve, the nation’s central bank, raised interest rates by a quarter point from a range of 0.25-0.5% to a range of 0.5-0.75%.
You’ve probably seen the news everywhere — but do you have any idea what it could mean for you?
We’re here to break it down in plain English.
What the Fed Rate Hike Could Mean for You
The Fed determines something called the “Federal Funds Rate,” which is basically the interest rate financial institutions charge each other to borrow money.
The lower the rate, the cheaper it is for banks to borrow — savings passed on to you.
To stimulate our economy and encourage spending, the Fed has only raised rates once since the crash of 2008. The fact it’s raising them again shows it’s feeling confident in our economy.
“My colleagues and I are recognizing the considerable progress the economy has made,” explained Fed chairwoman Janet Yellen. “We expect the economy will continue to perform well.”
So that’s good news, but what’s it mean for you? Not a lot — at least at first.
“The impact of a single rate hike is inconsequential,” Greg McBride, Bankrate.com’s chief financial analyst told Bloomberg. “It’s the cumulative effect that really matters.”
On that note, the Fed’s expected to raise rates three more times in 2017, according to Bloomberg. If these projections are correct, here’s how you might be affected.
Mortgages
Interested in buying a house? You may have noticed interest rates slowly climbing over the past few months. Since this hike was expected, banks have been building it into their rates.
It shouldn’t affect mortgage payments on your future home too much, though.
Let’s say the Fed raises rates three more times next year, each at a quarter point: Monthly payments on a $200,000 mortgage would cost about $44 more per month, according to McBride.
If you already own your house and have an adjustable rate mortgage, you might want to consider refinancing to a fixed-rate mortgage before interest rates climb further.
Rental Rates
As a renter, this could eventually affect you, too. Since it’ll be more expensive for landlords to purchase homes, they could pass this cost on to renters.
That being said, you might be able to afford it.
“Workers’ wages could rise at about the same time as rent prices,” Stephen D. Oliner, a resident scholar at the American Enterprise Institute and former member of the Federal Reserve Board, told the New York Times.
… Just make sure you don’t live in one of these cities with skyrocketing rents.
Credit Cards
If your credit card has a variable APR, your interest rates could spike if the Fed continues to raise rates.
So, pay down debt now. If you really can’t, switch to a card with 0% interest — making sure to pay it off before the promotional period ends.
And most importantly, stick with your goals of living beneath your means and improving your credit score.
“For credit card debt, I would be more concerned with credit scores than with the Fed,” Matt Shapiro, CFP®, explained to LearnVest. “An individual’s credit score has a much larger impact on their interest rate.”
Other Loans
Interest rates for other loans might increase, as well, including those for college, small businesses and cars.
On student loans, for example, interest could go up by one or two percentage points in the next few years, the Times reports.
And when it comes to auto loans, Princeton economist Markus K. Brunnermeier told the Times: “If you’re thinking of buying it now or in two years’ time, you should buy it now.” (But only if you can afford it!)
Although you might not be stoked about these changes, remember they’re a direct result of a healthier economy — and overall, that’s a very good thing.
“The bottom line, ostensibly, is that the economy is getting stronger,” Dean Baker, co-director of the Center for Economic and Policy Research, told the Times.
“Nobody in their right mind would say, ‘I’d rather have higher unemployment and lower interest rates.’ Nobody wants to pay a higher interest rate, but I think that’s an easy choice for most people.”
Your Turn: What do you think of the rate hike?
Susan Shain, senior writer for The Penny Hoarder, is always seeking adventure on a budget. Visit her blog at susanshain.com, or say hi on Twitter @susan_shain.
The post What the Fed’s Rising Interest Rates Could Mean for You (In Plain English) appeared first on The Penny Hoarder.
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