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Consumers with credit card debt, variable rate mortgages and net lines of credit will be the most affected by the Fed's rate hike.
USA TODAY & # 39; HUI
The latest Fed interest rate hike could affect adjustable rate mortgages.(Photo: Thinkstock)
The Fed is expected to announce a further rate hike on Wednesday, which means higher borrowing costs for Americans. But this measure should also continue to drive up the savings rates of bank customers who are finally starting to record decent returns.
According to experts, rates on credit cards, variable rate mortgages and net lines of credit will increase. All are variable rate revolving loans that are directly affected by the Fed's decision. The Federal Reserve will likely raise its short-term policy rate by a quarter of a percentage point to between 2% and 2¼%.
"Rates will only increase," says Nick Clements, co-founder of MagnifyMoney, a personal finance site. "This means that life will be more expensive for debtors and more rewarding for savers. If you are in debt, now is the time to lock in as low as possible. "
Monthly payments on a new auto loan could also increase, though some car buyers might not feel it because of car dealer incentives. And the effect on 30-year mortgages and other long-term loans would likely be moderate.
The expected rate hike on Wednesday would be the third this year and eighth since the Fed began raising short-term rates at the end of 2015. A fourth increase is expected in December.
How movements could affect consumers:
Credit Cards, HELOCS, Variable Rate Mortgages
These loans will become more expensive in the coming weeks, as their rates are generally linked to the prime rate, which is itself affected by the Fed's reference rate.
Average credit card rates are 17.31 percent, according to Bankrate. For a credit card balance of $ 10,000, a quarter point increase is likely to add $ 2 a month to the minimum monthly payment, says Clements. The cumulative effect of eight increases since the end of 2015 is $ 16 more per month, said Greg McBride, Chief Economist of Bankrate.
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Credit line rates on net worth are much lower at 6.07%, according to Bankrate figures. A quarter point increase on a $ 30,000 line of credit increases the monthly minimum payment by $ 6.25 a month.
In contrast, rates on variable rate mortgages are changed annually. The impact can therefore be immediate. According to MagnifyMoney, four four-quarter increases in 2018 would increase the monthly payment on a $ 200,000 mortgage from $ 84 to $ 112.
Fixed rate mortgages
The Fed's key short-term rates only indirectly affect 30-year mortgages and other long-term rates. These rates more closely follow inflation expectations and the long-term economic outlook.
The average fixed mortgage rate of 30 years has already increased from around 4% in early January to 4.65%, largely because investors expect tax cuts and an increase. federal spending and a healthy economy. The likely rise in rates on Wednesday is already tied to mortgage rates.
For buyers, the impact on the monthly bill would probably be relatively small. At the end of the year, a quarter point increase on a mortgage of $ 200,000 would increase the monthly payment by about $ 30.
Existing fixed rate mortgages are not affected.
Other measures of the Fed could also play a role. A year ago, the Fed announced that it was gradually reducing the portfolio of bonds that it had accumulated during and after the financial crisis in order to reduce long-term rates. This probably has a bigger effect on fixed mortgage rates
Auto loans
In theory, a quarter-point rate hike would spill over to new auto loans, which would increase the monthly payment of a new $ 25,000 car by $ 3. Existing loans would be unchanged. But "automakers frequently offer discounted financing to encourage car sales and banks and other lenders are competing with those rates," says Tendayi Kapfidze, chief economist at LendingTree. According to Bankrate, five-year auto loan rates are currently 4.8% on average.
Bank savings rate
As banks will be able to charge a little more for loans, they will have a little more leeway to pay higher interest rates on deposits made by customers.
Do not expect a quick or equivalent increase in savings accounts or CD rates, many of which bear interest at 1% or less. These rates barely moved last year despite the Fed's hikes.
Low lending rates have resulted in reduced profit margins for banks for years. They can now benefit from a greater margin between what they pay customers in interest and what they earn loans. Since they are still struggling with deposits, they do not need to attract more customers to make loans.
Still, a handful of online banks and community banks, credit unions and more hungry money market funds for deposits pay up to 2.5% in one year compared to 2.15% in March. Fed rate hikes this year are expected to increase the rate closer to 3% by December, said McBride.
And the highest rates of savings and the money market should reach 2.5% at the end of the year, against 1.5% in early 2018, he said.
This is not news that the college has taken awards, leading many people to take out loans.
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