Just six weeks ago, Americans faced significantly higher borrowing costs as the Federal Reserve launched an aggressive interest rate hikes to curb rising inflation.
Now the Fed is putting those rate hikes on steroids, and consumers will have to dig even deeper into their wallets to repay their loans.
After raising its main short-term interest rate from near zero by a quarter of a percentage point in March, the Fed is expected to hike it another half a point on Wednesday, its biggest hike in 22 years. The move will result in higher rates on everything from credit card for mortgages.
“That means your debt is going to get a lot more expensive quickly,” says Matt Schulz, chief credit analyst at Lending Tree.
And that’s only the beginning.
How many interest rate hikes are expected in 2022?
Goldman Sachs predicts the central bank will approve another half-point hike in June before moving to quarter-point increases the rest of the year. That would represent a total of 2.25 percentage points in rate increases this year, the most since 1994, leaving the benchmark rate in a range of 2.25% to 2.5% by the end of 2022.
“It’s really the cumulative effects of all these increases” that will pinch borrowers, Schulz says.
On the bright side, consumers, especially seniors and others on fixed incomes, will finally see bank deposit rates rise from paltry levels, especially for online savings accounts and CDs.
What is the inflation rate in 2022?
Fed policymakers felt the urgency to act faster after the consumer price index hit a 40-year high of 8.6% in March. The Fed had kept its federal funds rate near zero for two years to make borrowing cheaper and encourage spending to help pull the economy out of a COVID-19-induced recession.
But the Fed now finds itself in a delicate position: it must raise rates to calm spending and inflation without tipping the economy into recession.
Wednesday’s rate increase will have the biggest impact on credit cards, variable rate mortgages and home equity lines of credit. All are directly affected by the movements of the Fed.
Americans with 30-year mortgages are already feeling the pinch, as most of the Fed’s planned increases this year are factored into mortgage rates. Car buyers will be slashed, but less dramatically.
“Rising interest rates mean that borrowing costs more and saving will eventually pay more,” said Greg McBride, chief financial analyst at Bankrate. “It hints at the steps households should take to stabilize their finances — paying down debt, especially expensive credit card and other variable-rate debt, and boosting emergency savings.”
How do rising rates affect credit cards, adjustable mortgages, HELOCs?
Credit cards, variable rate mortgages and home equity lines of credit (HELOCs) will become more expensive in the next month or two. This is because they are tied to the prime rate, which in turn is tied to the Fed’s benchmark rate. In other words, a half-point increase from the Fed is largely passed on.
Credit card rates average 16.4%, according to Bankrate.com. For a credit card balance of $5,000, a half-point increase will likely add $193 to the total interest for borrowers who make the minimum monthly payment, says Ted Rossman, senior industry analyst at Bankrate.
A total of 2 percentage points of rate increases the rest of the year would add $800 in interest until the balance is paid off, Rossman says.
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Schulz says consumers with good credit can qualify for a balance transfer card that charges no interest for a year or more. Consolidating debt into a personal loan with a lower fixed monthly rate is also a good option, he says.
The average rate for a home equity line of credit is 4.15%, says Rossman. A half-point increase on a $50,000 line of credit increases the minimum monthly payment by $21, he says. A 2 percentage point increase the rest of the year would cause the monthly tab to increase by $83.
In contrast, variable rate mortgages are changed once a year after the fixed rate period ends, usually after five years. The effect will therefore be delayed, but then it could sting. An ARM whose rate drops from 3.85% to 5.85% the rest of this year would increase the monthly payment on a $300,000 variable rate mortgage by $363, Rossman says.
Are real estate interest rates rising?
30-year fixed-rate mortgages follow the movements of the 10-year Treasury note and are only indirectly affected by the short-term Fed rate. The outlook for the economy and inflation are also important factors.
Homeowners with existing fixed rate mortgages will see no change. But recent and potential homebuyers are shocked by higher rates that take into account the Fed’s planned increases through much of 2022.
The average 30-year fixed rate is 5.1%, according to Freddie Mac, up from 3.11% at the end of last year. This increased the typical monthly principal and interest payment on a $300,000 mortgage from $346 to $1,628, according to Bankrate’s mortgage calculator.
As the Fed chases and raises rates, mortgage rates could rise further, perhaps as much as 6%, Rossman says. This would raise the monthly mortgage bill an additional $170 to $1,798.
“Buying a home has become more difficult for many in the market,” says Jacob Channel, senior economic analyst at Lending Tree. A silver lining, he says, is that it should cool demand for homes, slow scorching price growth and provide buyers with more options and some relief from the bidding wars.
How does the Fed affect auto loans?
A half-point Fed rate hike on Wednesday should make its way to new auto lending, but the toll should be less painful. The monthly payment for a five-year, $25,000 new car loan would increase by about $6 a month, Rossman says.
And if average auto loan rates rise from the current 4.47% to 6.47% by the end of the year, the monthly bill would increase by about $23, he says.
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How does the Fed affect bank savings interest rates?
As Fed rates rise, banks will be able to charge a bit more for loans, giving them more profit margin to pay a higher rate on customer deposits.
Don’t expect a quick or equivalent increase on most savings account and CD rates, says Ken Tumin, founder of DepositAccounts.com.
Since the pandemic, banks have been teeming with deposits and loan demand has been weak due to the COVID-19-related slowdown, Tumin says. In other words, most traditional banks don’t really need your money.
The average savings rate is a tiny 0.06%, Tumin says, even after the Fed hike in March. The one-year average CD rose slightly after the Fed’s decision, but it’s barely noticeable — from 0.14% to 0.17%, Tumin says. These probably won’t move much after the Fed’s actions on Wednesday.
“Most of the action will be on online banking,” says Tumin. They have lower costs and face more intense competition since consumers can more easily transfer their money from one online bank to another, he says.
The average online savings rate has risen 0.5% to 0.54% since the Fed’s rate hike in March, he says. And the typical one-year online CD fell from 0.67% to 1%, Tumin says.
For CDs, online banks anticipate future moves by the Fed and attempt to entice consumers into locking in a relatively high CD rate that will remain a bargain for the bank after the wave of Fed increases.
5-year CD rates have climbed even more sharply, rising from 1.1% to 1.7% since March.
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This article originally appeared on USA TODAY: Fed Rate Hike 2022: How Interest Rates Will Affect Mortgages and Lending