WHAT A FED RATE HIKE MEANS FOR YOU
Wednesday is the big day! The central bank is widely expected to raise its target federal funds rate off of zero for the first time since 2006. While it may be a small increase, it could have a trickle down effect on your bank account, 401(k), adjustable-rate mortgage loan and even your credit card. Full report: http://cnb.cx/1P5ogLY
- •MortgagesThe Fed has little influence over long-term, fixed-mortgage rates, which are pegged to yields on U.S. Treasury notes, so don't expect higher mortgage rates to weigh on your ability to buy a home or refinance in the near future. But with interest rates rising, adjustable rate mortgages could be heading higher, too — so don't be surprised to see some payment increases down the road if you have one.
- •Auto loansFor those planning on purchasing new wheels in the year ahead, interest rate increases are not going to have any material effect on your ability to buy a car. A quarter-percentage point difference on a $25,000 loan is $3 a month. "Nobody is going to have to downgrade from an SUV to a compact because of interest rates." However, this is a good reminder to car shoppers to find the best financing offer before you buy.
- •Credit cardsCredit card rates are predominantly pegged to the federal funds rate and will rise in step with interest rate increases. APRs are variable rates, which means they are tied to the benchmark rate, and if that rate rises, you could also see your rate increase — typically in one to two credit card cycles without any advance notice. So, "grab those zero-, or low-rate, balance transfer offers while you still can to pay off or pay down your debt"
- •SavingsStashing some cash in a savings account has yielded nearly nothing for years, aside from peace of mind, and that's not likely to change much. The average rate on a savings account is 0.08 percent, according to Bankrate.com — less than the rate of inflation. Even with a Fed rate hike, banks may not pass on any of that increase to their customers, which means the interest on deposits will remain near rock bottom.
- •Student loansFederal student loans with a fixed interest rate won't be impacted by a rate hike. But if you have a private loan with a variable rate, that rate is likely to rise, which means so will the interest you pay on the principal of the loan. If you have private loans with variable rates — and you are worried about it — it's not too late to refinance into a fixed-rate loan and lock in a low rate. Even a loan that's already been refinanced can be refinanced back to a fixed-rate loan.
- •401(k) plansBond funds are a big part of many 401(k) plans, and there's likely to be some volatility there in the short term since bond prices fall when rates rise. However, "the higher coupons will ultimately deliver higher returns if investors grit their teeth and hold on" "If the Fed is raising rates, it's a sign of a healthy economy and that's ultimately good news. Maintain that long-term perspective."