How Federal Reserve interest rate increase affects you?

Do you know how FED interest rate hikes impacts your finances?

Since 2008 financial crisis the Federal Reserve has increased its benchmark interest rate for the second time. The interest rate hike has been announced on 14th of December. According to this announcement the new benchmark interest rate will target the range from 0.5% to 0.75%. Before the interest rate increase, the range was from 0.25% to 0.5%. Although, this might be considered as a small rise in the Fed interest rate, keep in mind that couple of more increases are expected during 2017.

The latest interest rate increase is expected to affect different segments of the economy. One segment which might be affected is the lending market, i.e. the borrowers.  This is in a sense that we could expect the price of loans to go up as well, because of the increase in Federal Reserve interest rate. The decision for rise in benchmark interest rate could have effect on the cost of different types of loans. This effect may not become evident immediately, but in the future the costs of loans will increase.

The Federal Reserve interest rate increase effect on mortgages

 As a result of the last financial crises, the benchmark interest rate has been all time low. This means that the mortgage loans have never been more affordable. With the announcement of interest rate hike, and expectation for more increases to come in 2017, the cost of mortgage loans could increase. This means that purchasing a new home will become more expensive. In addition, borrowers who have taken an adjustable rate mortgage will face an increase in their monthly payments, and the overall mortgage cost. Moreover, if you have purchased your home with a fixed-rate mortgage, then most probably you got a better deal. Thus, you will not consider refinancing because the new interest rate could be higher, than the one you are currently paying.

The Federal Reserve interest rate increase effect on Credit card rates

Credit cards are one of the most expensive form of credit you can have. The interest rate you could be paying on your credit cards can anywhere from 13% to around 20% (maybe more). This interest rate is affected by the prime rate, which in turn is affected by the Fed interest rate. Increase in Fed’s interest rate could affect the APR on your credit card. Knowing about the anticipated increases in 2017, it might be a good time to plan ahead and repay your credit card debt. In the meantime keep an eye on your credit card monthly statement and see if there are any changes in your APR.

Increases in Fed’s interest rate should not be ignored because of the effect it could have on you. Meaning that, this increase in interest rate will signal the increase in the cost of the loans, especially the mortgage loans. A half percent increase in interest rate on your mortgage could mean higher monthly payment. The increase in monthly payment could be hundreds of dollars depending on the amount of your mortgage. If we additionally consider that there might be more increases in 2017 it means that you should make a serious consideration about your current, or even future, debt. In period of rise in interest rates, maybe it is better option to go for the fixed interest rate loan. This is in terms of the existing and new debt. If you have adjustable rate mortgage, see if it would better for you in the long run to fix the rate on your mortgage. If you are planning to apply for a mortgage (or any type of loan for that matter) make sure that you consider a fixed-interest rate as an option.

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