The Federal Reserve has raised interest rates once so far this year — and it’s on track to raise them twice more in 2017. But how does a Fed rate hike affect you? Watch the video above and in the next two minutes, all borrowers and savers will be able to say “Now I Get It.”
The Federal Reserve, or the central bank of the United States, works to help stabilize the nation’s banking and financial system. One way the Fed does that is by controlling interest rates.
When there’s an interest rate increase, borrowing money gets more expensive — but it’s a sign that our economy is improving. For ordinary consumers like you and me, it means you’ll pay more to borrow money for things like a home.
If you’re already locked into a fixed-rate mortgage on your home, a rise in interest rates won’t affect your loan. On the other hand, variable (or adjustable) rate mortgages are not fixed and are therefore susceptible to changes in interest rates.
And small bumps can make a big dent in your wallet. Let’s say you have a 30-year mortgage worth $200,000, with a variable rate, and the interest rate has gone up by 0.75% — from 5% to 5.75%. That means you’ll spend $90 to $100 more a month in mortgage payments.
So if you’re in the market for a mortgage or know you will be soon, it’s a good idea to start shopping around now as mortgage rates have already been climbing in the last few months. In fact, the 30-year fixed rate rose to a nearly 3-year-high in March.
Your credit cards
Like adjustable-rate mortgages, a rate hike can affect a credit card’s APR, in as soon as a month. And as interest rates rise, the APR, or annual percentage rate, which you pay on your credit card balance – goes up, too. With the average APR being a whopping 15%, an increase of 0.75% could feel small, but you should still expect your minimum payment to go up.
Your savings accounts
For savers, it means you could get a higher rate of return for your savings accounts — but keep your expectations low. If it does happen, it’ll take time for the higher rates to trickle down to your money-market accounts.
Car loans are less affected by the Fed’s hikes because there’s so much competition that keeps interest rates on auto loans low. For those of us with student loans, there’s not much to worry about since federal college loans have had fixed rates since 2006, but if you have private loans with variable interest rates, your education will certainly cost more than it did before. And future college borrowers may be affected if Congress, which determines student loan rates, raises them.
So if you owe money, expect to owe more. If you’re a saver, great, hopefully you’ll make more. Either way, when it comes to the Fed’s rate hikes, you’ll be able to say Now I Get It.