As the Fed keeps rates close to zero for now, what this means for you

Even though the The Federal Reserve did not raise its key rate on Wednesday, so your borrowing costs may start to rise again.

The rise in prices induced by the economic recovery allows the central bank to unwind last year’s bond purchases. While the central bank has said interest rates will stay close to zero for now, lowering bond purchases is seen as the first step on the path to higher interest rates.

And that, on its own, can affect the rate you pay on your mortgage, credit card, and car loan.

“The reduction in itself will increase returns in the medium to long term, which will translate into higher borrowing costs,” said Yiming Ma, assistant professor of finance at Columbia University Business School.

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Right now, homeowners have an unprecedented opportunity to refinance or withdraw money from their homes at record rates.

The 30-year average fixed rate home loan is around 3.03%, the lowest since February, according to Bankrate.

“Refinancing is the most impactful step most households can take,” said Greg McBride, chief financial analyst at Bankrate.com.

“The ability to reduce your monthly payments by $ 200 gives you a little leeway at a time when so many other costs are on the rise. “

Once the Fed begins to slow the pace of bond purchases, long-term fixed mortgage rates will inevitably rise, as they are influenced by the economy and inflation.

While the Fed signals a move away from its easy money policy, “that likely means it will cycle through rate hikes sooner,” Ma said.

“This could also be directly reflected in short-term rates,” she added. “It is understood that one will follow the other.

Many homeowners with variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, could be affected. When the federal funds rate increases, the prime rate will also increase.

The same goes for other types of short-term loans, especially credit cards.

Credit card rates are now as low as 16.21%, down from 17.85%, according to Bankrate, but most credit cards have a variable rate, which means there is a direct link to the rate. Fed benchmark.

“They’ve actually risen since bottoming out shortly after the Fed’s rate cuts in March 2020,” said Matt Schulz, chief credit analyst for LendingTree.

“The rates are still much lower than they were before the pandemic, but over time these little movements really add up,” he added. “And with the current economic uncertainty, it is likely that card rates will continue to rise, even without any help from Washington, DC.”

Borrowers should call their card issuer and request a lower rate, switch to a zero interest balance transfer credit card, or consolidate and pay off high interest credit cards with a home equity loan or personal loan, a advised Schulz.

Currently, the average interest rate on personal loans is down to 10.46% and a home equity line of credit is as low as 3.88%. Anyone who buys a car will see a similar trend with auto loans. The five-year average new auto loan rate fell to 3.95%, according to Bankrate.

“It can be a good tailwind to help you get out of debt,” McBride said.

Even student loan borrowers are nearing the end of their hiatus on federal student loan payments, which the US Department of Education has been proposing since the start of the pandemic. (If you’re still unemployed or experiencing financial hardship due to Covid, there are other options for dealing with college debt.)

Only savers can benefit once rates start to rise, although it happens much more slowly.

The Fed has no direct influence on deposit rates; however, these tend to be correlated with changes in the target federal funds rate. As a result, the average yield on online savings accounts fell to 0.45%, down from 1.75% since the Fed cut its benchmark rate to near zero, according to DepositAccounts.com founder Ken. Tumin.

The savings account rates of some of the biggest retail banks are even lower, at just 0.06% on average.

“Based on the history from 2015 to 2017, no significant increase in savings account rates is expected until the Fed begins its rate hikes,” Tumin said.

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