As of 11-22-16 the implied probability of a Federal Reserve rate hike in December 2016 is now about 93%. (View the latest interest rate increase probability: FedWatch Tool) How will this affect your wallet? Prepare for these 7 areas of personal finance where you could see changes.
Mortgages | Home Financing - 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. Be mindful of when your loan adjusts so you can budget accordingly. If you can, it could make sense to learn about your possible refinancing options as well. When interest rates rise, consider that a $500,000 mortgage going up half of 1 percentage point of interest means a difference of $50,000 or more over 30 years
Home Equity Lines of Credit - HELOC (Home Equity Line of Credit) is tied to the federal funds rate. That's because HELOC rates are typically linked to the prime rate. When the Fed raises or lowers its target rate, HELOC rates follow. If you want to redo your kitchen or start other home renovations you might use your HELOC. So home renovations could be more expensive after the rate hike. Another common way people use their HELOC is to refinance or restructure debt. When interest rates go up it can be more expense of to pay-off consolidated debts.
Student Loans - Federal student loan rates are fixed, so most borrowers won't be impacted immediately by a rate hike. But if you have a private loan, those loans may have a variable rate. "If you have a loan with a variable rate, and there is a rate hike, the interest rate will go up accordingly," according to Max Spiegel, chief operating officer Student Loan Hero, a student-loan management site. "That being said, it will be a very gradual, steady increase and that will allow people time to refinance into a fixed rate if they are uncomfortable in the long term," he said.
Auto Loans - The federal funds rate influences short-term interest rates, because it's a rate on money lent overnight between banks. This affects medium-term fixed loans, such as auto loans. Generally speaking, auto loans are relative to the prime rate which fluctuates with the federal funds rate. If you buy a car after the rate hike it’s likely your monthly payment will be more than early this year.
Credit Cards - A rate hike in December means lots of credit card holder should prepare for their rate going up. Most credit cards have a variable rate, which means there's a direct connection to the benchmark rate. After a Fed interest rate hike, credit card holders will likely see an increase on their bill within a few billing cycles. So it’s possible to pay down high-interest credit card debt now to save money.
Savings - A savings account has yielded nearly nothing and that's not likely to change much. The average interest rate on a savings account is less than 0.08 percent right now, according to Bankrate, and even with a Fed rate hike, banks may not pass on any of that increase to their customers, which means interest on deposits will probably remain near rock bottom.
CDs - If you rely on interest from certificates of deposit for income, you're probably not too happy with the Fed keeping interest rates at rock bottom. CD rates largely follow the short-term interest rates that track the federal funds rate. However, Treasury yields and other macroeconomic factors can influence rates on long-term CDs. Individuals should focus on the real rate of return on CDs, after inflation is taken into account, says Casey Mervine, vice president and a senior financial consultant at Charles Schwab.
Sources: CME Group, BankRate, CNBC, Trading Economics
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