The Federal Reserve Board announced Wednesday that it would raise interest rates just in time for the new year and a new administration.
Now that the Fed has made its 0.25% hike, the next step for consumers depends on which side of the saving-borrowing divide they stand. Here is some guidance on the most pressing questions from savers, homeowners, home shoppers, credit card holders and investors.
1. What impact will the rate hike have on my retirement savings?
Predicting the effect that the federal funds rate increase has on any individual investor’s retirement savings depends a lot on his or her near-term plans for the money and what’s in his or her portfolio.
When a rate increase is expected, the effect on the overall market is usually baked into stock prices already, at least partially. It’s reasonable to expect at least a bit of short-term stock market anxiety in response to the news. Intermittent volatility in exchange for higher potential returns on your long-term savings is par for the course. The stock market’s post-election dive and quick turnaround race to all-time highs is just the most recent example.
2. Should I adjust my investing strategy?
In NerdWallet’s new end-of-year financial savings survey, 17% of Americans said stock market volatility is one of their top sources of financial anxiety. Our advice for how to handle potential market turbulence remains the same as it always has been for long-term investors: Take a deep breath, don’t make any sudden moves and concentrate on the things you can control.
3. What does the rate hike mean for my savings account?
Rates on savings accounts might go up, but they won’t jump overnight and increases wouldn’t be significant. Banks consider many factors when setting savings rates, and a Fed rate increase doesn’t play a huge role in those decisions.
It’s probably best to keep your expectations low. When the Fed announced its hike in December 2015, many of the biggest banks reacted in the same way: They raised loan rates and left savings rates unchanged. This boosted banks’ margins.
4. Will the rate hike affect my CDs?
Standard certificates of deposit will be affected in much the same way that savings accounts will: Rates might go up over time, but not by a lot. Keep in mind that most standard CDs come with fixed interest rates, so even if your bank’s rates do go up, your CDs’ annual percentage yields won’t change.
Some banks, however, offer bump-up CDs that let customers request a rate increase if the bank’s rates rise. In most cases, customers can exercise this option only once during a CD’s term. These types of CDs usually have lower interest rates than fixed-rate certificates, and many have higher deposit requirements. If your bank’s rates go up, ask your financial institution to adjust your CD accordingly.
5. Is the interest rate on my credit cards going up?
Probably. Interest rates on credit cards typically rise or fall with the prime rate, which is directly affected by the Fed’s action. When the Fed boosted rates by 0.25% in December 2015, most major issuers raised the annual percentage rates on their cards by an equal amount within a month or so. If your rate is going up, you might not even hear about it from your credit card company. Although card issuers usually have to give you 45 days’ notice of an increase in your APR, there’s an exception for increases triggered by a change in the prime rate. So keep an eye on the APRs listed on your credit card statement. A higher APR on your credit card means it will cost more to carry debt, although how much more depends on your balance.
6. How will a rate hike affect my mortgage?
Thirty-year fixed mortgage rates rose more than half a percentage point in the four weeks after the election of Donald Trump, according to the NerdWallet Mortgage Rate Index. Rates are solidly over 4% for the first time this year. On a 30-year fixed-rate mortgage for $300,000, each half-point increase adds close to $100 a month to your payment.
So that’s already happened.
With additional Fed rate hikes expected next year, mortgage rates may have as much as another half a percentage point to go. That would put home loan interest rates just under 5% by the end of 2017. Refinance activity has already taken a hit because rates have climbed to their highest levels since July 2015.
And that’s before Republicans begin implementing their stated agenda to reduce the government’s role in the mortgage market. Those moves could also cause mortgage rates to edge higher, though it might take awhile.
- If you’re already a homeowner with a fixed-rate mortgage, you’re all good. Your rate is set.
- If you have an adjustable-rate mortgage, you’ll probably see your payments increase over the next year, depending on how often your rate resets. Keep an eye on mortgage rates and consider moving to a fixed-rate loan. You may want to begin the mortgage shopping process soon if you intend to stay in your home for a few years.
- If you have a home equity line of credit, it’s a good time to consider your options. You may want to convert it to a fixed-rate home equity loan, or budget for paying off your line of credit before rates move much higher.
7. Should I worry if I’m shopping for a home?
If you’re all set to buy, don’t let moderately higher mortgage rates worry you. Proceed according to your plan. Although the long-term outlook seems to indicate steadily rising interest rates, we’re building on very low ground. You know that whole “historically low mortgage rates” thing you’ve heard for the last few years? Yeah, we’re still there.
It will take a long climb higher before mortgage rates are back to their 44-year historical average of 8%. In the meantime, you’ll be in the money with a 4% or 5% home loan. Even a 6% mortgage is a significant discount to the average.
Yes, your buying power can be affected by higher interest rates, but that can also be offset by the better wages and greater employment opportunities of an improving economy.
This article was written by Dayana Yochim, Tony Armstrong and Hal Bundrick, staff writers at NerdWallet, a personal finance website.