Time to re-check the fine print of your mortgage agreement…
The Federal Reserve continues its response to the ongoing concerns around rampant inflation in the United States. This week, the central bank rose short-term interest rates by 0.75 percent, which is only the latest in a series of hikes recently. But what does this interest rate mean, exactly, for the American people?
This interest rate increase will not have the same effect on your life as inflation has in the last few months. In fact, you might not see a marked change in the cost of goods or products whatsoever. Instead, this interest rate will be reflected in credit card bills, savings accounts, and the fine print on the next bill for your home loan.
The interest rates on your credit card are about to go up — and so are the interest rates on your savings accounts
The Federal Reserve’s interest rate hike is both good news and bad news, depending on your current financial status. The bad news is that if you have credit card debt, your monthly interest rates are about to get more expensive. The good news is that if you have money in a savings account, then the interest rate on that account is about to rise as well.
Speaking to CNBC earlier this year, Greg McBride, chief financial analyst at Bankrate.com, explained this paradox. “Rising interest rates mean borrowing costs more, and eventually saving will earn more,” McBride said.
He went on, “This hints at the steps households should be taking to stabilize their finances — pay down debt, especially costly credit card and other variable rate debt, and boost emergency savings. Both will enable you to better weather rising interest rates, and whatever might come next economically.”
Your mortgage or home loan may become more expensive, depending on the details
If you own a home via a 15- or 30-year fixed mortgage, then the federal reserve interest hike won’t impact your loan in any way.
But if you have an adjustable-rate mortgage, then your rates will most likely change. This is because fixed mortgages lock in a permanent interest rate at the time that you sign for the loan, and adjustable-rate mortgages and home loans like HELOCs allow for a fluctuating rate.
However, since adjustable-rate mortgages are generally appealing because they tend to offer a lower interest rate than a fixed mortgage rate, this doesn’t mean you’re immediately going to see a massive jump in your monthly payments. If you don’t know how this interest rate will impact your home loan or mortgage, you can call the company that owns the loan or mortgage and they should provide you with all the information you need.
Buying a house or car might become even more competitive
If you’re in the market for a new home or car, then you might expect that the rising interest rates would mean the competition would decrease for these commodities. Unfortunately, it’s more likely to be the exact opposite.
The already-hot housing and car markets might continue to be extremely competitive, mostly because people who need loans to secure homes and cars will have to compete with those who are willing to pay homes and cars in cash. According to Axios, the percentage of homes bought in cash reached 28 percent this March, the highest percentage we’ve seen in a decade.
What this means is that the Federal Reserve’s effort to cool down the economy by raising interest rates might not be as effective in cooling down the housing market. If you’re not sure what this means for your future, or how to prepare for an uncertain economic future, you can check out this interview with financial expert Pattie Ehsaei about how to stay financially stable during economically unstable time periods.
