What to Expect When the Fed Raises Rates

According to a recent AARP article, now that the Federal Reserve (Fed) has begun raising rates, consumers will start to feel the effects.  A rate hike usually signifies more will be coming in the future.  When rates go up, banks tend to increase the prime rate, and this will have an impact on certain financial products.  What does this mean for you as a consumer?1

Credit Cards

Most credit cards carry a variable rate which is tied to the prime.  Therefore, when the prime goes up, card issuers usually pass these increases on to consumers.  The increase impacts customers with high balances the most, so it’s best to reduce your debt as much as possible before rates continue to go up.  Another option is get a zero percent interest card and transfer your balance.1

Home Equity Lines of Credit

Similar to credit cards, home equity lines of credit (HELOC) often carry a variable rate.  Therefore, when interest rates rise, so does the borrower’s payment.  The article states that if you have a HELOC that’s 10 years old or older, you may want to think about refinancing to a lower rate before the Fed acts again.  Older HELOC rates were often set at prime plus 2 or 3 percentage points.  Whereas, new lines can be lower, at 1 or 1.5 percentage points above the prime.1

Mortgages

New adjustable rate mortgages are also affected when rates increase, although not necessarily at the same pace.  For example, if the rate goes up by a quarter of a percentage point, a new adjustable mortgage may rise by less than that because lenders want to keep their rates attractive.  The rate increase will also affect fixed rate mortgages that become adjustable.1

Student Loans

The rate on federal student loans is set each summer, but then remains fixed for the life of the loan.  However, many of the private student loans out there carry a variable rate, and therefore, are tied to the prime or another benchmark.  As a result, when these benchmarks rise, students will likely see a similar rate increase on their loans.1

Savings

Unfortunately, consumers have not seen much in the way of interest on their savings accounts in recent years.  According to the article, it is recommended that consumers shop around for the best deal as not all institutions are going to pass along the higher interest rates to their customers.1

If you’re looking for a way to pay off debt and supplement your retirement income, a reverse mortgage may be an option.  A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan.  A reverse mortgage enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3

If you’d like to learn more about reverse mortgages, please use our Reverse Mortgage Calculator or call 800-218-1415.

 

1 What to Expect Now That the Fed Has Begun Raising Rates – aarp.com, 12/15/15, http://www.aarp.org/money/investing/info-2015/what-to-expect-when-the-fed-raises-rates.html.

2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.

Author:  Meredith Manz