What the Fed Rate Hike Means for Mortgages, Credit Cards, Loans, Retirements – WPXI

The Federal Reserve: What you need to know The Fed acts as a lender of last resort for member institutions that have no alternative to borrowing. (NCD)

The US Federal Reserve announced on Wednesday that it would raise short-term interest rates by three-quarters of a percentage point, the largest rate hike in 28 years.

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The move, aimed at bringing down a 40-year inflation figure, will hit Americans’ wallets in a number of ways.

Wednesday’s rate hike follows two other rate hikes initiated by the Fed this year – a 0.25% hike in March and a 0.5% hike in May. More rate hikes are expected, a 0.75% hike in July followed by two 0.5% hikes in September and November.

How will the interest rate hike affect your finances? Here’s what we now know.

First, what is the Fed?

The Federal Reserve or “Fed” is the central banking system of the United States. Its purpose is to regulate the money supply by keeping prices stable (inflation control) and maintaining full employment.

What is the Federal Funds Rate?

The Federal Funds Rate, or “Fed Rate,” is the interest rate that banks charge each other to lend money to each other overnight.

It is conducted overnight to meet federal regulatory requirements and be ready for market conditions in the morning.

Well, how are the rates affecting your life?

Home Mortgages

Mortgage rates have risen since last fall when the Fed announced its intention to hike rates.

This trend is likely to continue. The interest rate on Tuesday, 6.28% for a 30-year fixed rate, is the highest since 2008. The interest rate fell slightly on Thursday.

“Mortgage rates are definitely going to go up over the next few weeks,” Matthew Pointon, senior real estate economist at Capital Economics, told The Wall Street Journal.

How high they will be is not clear.

“Given that they’ve already risen so dramatically, it’s difficult to say how much mortgage rates will rise by the end of the year,” said Jacob Channel, senior economic analyst at LendingTree.

How does a rate hike affect the cost of a mortgage?

If you had a $300,000 loan with a 30-year fixed rate of 3.11% — the rate calculated in December — you’d be paying about $1,282 a month.

The same loan with a 30-year fixed rate of 6.28% (average Tuesday rate) would cost another $571, according to Grow’s mortgage calculator, leaving your monthly payment at $1,853 per month.

credit cards

Credit card interest rates are based on the prime rate, or rate that banks use as a basis for setting interest rates on various types of loans and lines of credit. That means credit card rates will rise, according to Bankrate.com.

While credit card interest rates are tied to the federal funds rate, the federal funds rate is typically 3 percentage points higher than the Fed’s benchmark rate — the rate was hiked on Wednesday.

“With the frequency of Federal Reserve rate hikes this year, it’s going to be a drumbeat of higher rates for cardholders every few billing cycles,” Greg McBride, chief financial analyst at Bankrate.com, told the New York Times. “And the cumulative effect is growing. If the Fed hikes rates a total of 3 percentage points this year, your credit card rate will be 3 percentage points higher by the first of the year.”

The rate has risen from 16.34% in March to the current rate of 16.73%.

car loans

While credit card rates are tied to the prime rate, auto loans are typically tied to the five-year Treasury rate. This rate is also influenced by the Federal Funds Rate.

The Treasury rate refers to the current interest rate earned by investors on debt instruments issued by the US Treasury.

However, with car loans, other factors play a role in determining the cost of a loan, such as: B. a down payment, the creditworthiness of the buyer, the type of vehicle and other factors.

A borrower’s credit history, type of vehicle, loan term, and down payment all go into this interest calculation.

savings

An increase in interest rates can mean higher returns for savers.

When you save money at a bank, you essentially allow the back side to borrow your money. You lend them money and they pay you interest on it.

When the Fed interest rate rises, banks can raise interest rates on savings accounts to attract new customers.

Click here for some tips on managing savings accounts.

retirement accounts

When the stock market plummets like it has in recent weeks, your 401(k) account is likely to take a hit if you have a large number of stocks in your portfolio.

However, if you have retirement money from fixed income investments, you can see interest rates on those investments rising.

What is the rate hike costing you in dollars?

Each 0.25% increase in the Fed’s benchmark interest rate equates to an additional $25 per year in interest on $10,000 of debt.

In other words, the 0.75% hike the Fed initiated on Wednesday means an additional $75 in interest for every $10,000 you owe.

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