Federal Rate Hike: Pros and Cons

December 30, 2015

In-the-news

After nearly a decade of extremely low interest rates following the recession, the Federal Reserve has approved a rate hike by one quarter of a percentage point. While the Feds have vowed to ease into these new higher interest rates, this change could potentially have an impact on mortgages, credit cards, and auto loans.

Mortgages

If you currently have a fixed-rate mortgage, you should see very little change, but for those individuals with an adjustable or variable- rate mortgage, increased rates may have an effect. Chief financial analyst, Greg McBride, at Bankrate notes;

“A Fed rate hike is a big, flashing ‘caution’ sign to borrowers with adjustable-rate mortgages,” he says. “The cumulative effect of a series of rate hikes could produce big — and sudden — payment increases for ARM borrowers the next time their loan rate adjusts.”

Read more: http://www.bankrate.com/finance/federal-reserve/interest-rate-increase-winners-losers-1.aspx#ixzz3vp67bv22

The greatest impact could come for those individuals who are considering purchasing a home. Changes in interest rates, even small ones, can put a strain on your wallet.

According to the Washington Post’s article, “How the Fed’s interest rate hike could hit your wallet,” the number of new home buyers may be reduced due to increased mortgage rates.

“By increasing the total cost of buying a home, higher mortgage rates could also reduce the number of people who qualify for loans. Lenders are required to compare a person’s potential debt load to their income and some people who qualify for loans under today’s rates may not be eligible if rates go higher.”

Credit Cards

Interest rates on credit cards are expected to rise. According to the article, “How the Fed Rate Hike Will Impact Credit Cards and Saving Accounts,” by Nick Clements, a contributor to Forbes, these changes will take place sooner than later.

“If you have credit card debt, you should expect to see the interest rate on your credit card debt increase almost immediately. Credit cards typically offer variable interest rates, which means the interest rates adjust in real time on existing balances. Most credit card agreements will state that “APRs will vary with the market based on the Prime Rate.” If the prime rate increases, the interest rate on your existing balance will increase as well.

What does this mean? It may be harder to pay off credit card debt as well as other loans as time goes on and if you’re worried about finances, it may be worth it to tighten your budget and pay off any debt to avoid even higher rates due to missed or late payments.

Auto Loans

Those who already own a vehicle and have a fixed-rate loan shouldn’t be impacted by the hike rate, but those shopping for a new car may run into increased borrowing costs which may make it harder to afford a loan in the future.

Positives

While the rate hike may seem like it only brings higher costs, there are a few positives.

If you’re a saver, increased rates mean you should see an improvement on your returns. While these changes won’t be monumental, anything helps. This is especially true for senior citizens, many of which depend on retirement accounts for daily living.

For those who love to travel, increased rates may indicate a stronger dollar which means you can get more for your buck while you’re abroad.

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