What does the Fed rate hike mean for you?
Yes, the Fed is up by half a point this week. Yes, it affects your interest rates. But, maybe not exactly how you are thinking.
The hope is that the Fed can crush inflation while not killing an economy that lately has looked vulnerable. For us, this aggressive approach could bring relief from surging prices, but it also comes at a cost.
To better understand what this rate hike means to you, we first need to recognize, this is not your mortgage interest rate.
The federal fund rate is the interest rate at which banks borrow and lend to one another. So, when banks have to borrow and lend at higher rates… guess who is going to pay for the difference. That’s right you.
Although that’s not the rate that we pay as consumers, the Fed’s moves still affect the borrowing and saving rates we see every day.
The federal fund rate hike has an impact on your credit card rates, personal loans, and yes, mortgage rates.
Credit card rates are currently just over 16%, significantly higher than nearly every other consumer loan. The experts believe they may go as high as 18.5% by the end of the year — which would be an all-time record.
Adjustable-rate mortgages and home equity lines of credit are also pushed to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising, so if you are planning to finance a new car, you’ll shell out more in the months ahead.
But, here’s the thing, those rates did not automatically go up when the fed went up. In fact, banks had already increased their interest rates in preparation for this increase. In other words, that increase was already baked into your mortgage rates in the time leading up to the actual rate hike.
The average interest rate for a 30-year fixed-rate mortgage hit 5.55% this week. That’s the highest since 2009. The rate is up more than two full percentage points from 3.11% at the end of December.
The experts predict rates hovering around six percent by December.
There is some good news in all of this. The surging federal rate should bring some stability to home prices. We don’t expect values to fall or stop rising. But, price increases should slow down.