Mortgage News

Return to News

How will the Federal funds rate hike affect consumers?

On Wednesday, Federal Reserve Chair Janet Yellen made a much-anticipated announcement: The Federal Reserve voted to increase the federal funds rate.
12/16/2016 4:08:17 PM

On Wednesday, Federal Reserve Chair Janet Yellen made a much-anticipated announcement: The Federal Reserve voted to increase the federal funds rate. This is the first increase for 2016 and the second made in about nine years.

Though many economists knew an increase was probably in the cards for the final Fed meeting of the year, many consumers aren't sure what it means for them.

What is the federal funds rate?

By law, banks need to end each day with a certain amount of cash on hand. If they come up short, they do what many consumers do when they're low on cash: They ask a friend, or in this case, another bank.

The bank will usually agree to the short-term loan, but with an interest rate tacked on. The federal funds rate is the highest percentage a bank is allowed to charge another institution for borrowing money.

Initially, an increase in the federal funds rate doesn't impact many people outside the financial industry. But over time, banks will begin to pass along the newly increased costs to their customers. So, how does this impact you? It all depends on what sort of debt you have.

If you have…

A mortgage

Most people who take out a residential mortgage opt for the 30-year fixed-rate mortgage. The "fixed-rate" part means that your rate will stay the same as long as you don't change the terms of your loan. But if you plan to refinance in the future, you might find that your new rate is higher than the rate on your old loan.

If you chose an adjustable-rate mortgage, your rate will stay the same throughout the agreed-upon period - usually three, five or seven years. But after that, your rate adjusts annually, according to market changes. When this period begins, or if you're in this period already, you might begin to see higher monthly costs.

How you can save

If you have a fixed-rate mortgage with a relatively low interest rate, it's probably best to keep it where's it stands. But if you have an adjustable-rate mortgage, consider refinancing to a fixed-rate mortgage. You'll end up with a predictable monthly bill, and you might avoid high interest rate fluctuations in the future.

A credit card

Credit cards generally have much higher interest rates than mortgages, plus they compound. This means that if you carry a balance over from one month to the next, you'll be charged a certain percentage of that amount.

Then, if you still have a balance on your card by the time your next billing cycle ends, you'll be charged that same percentage, even on the fee accumulated through interest the month before. Because of this, an increase in your interest rate by even just one or two percentage points can make a big difference in the long run.

USA Today reported that banks will likely pass along their fee increases to credit card holders in the next few weeks.

How you can save

If you know you have a balance on your credit card that you've put off paying for a few months, now is a good time to take care of it. Paying your balance in full every month is the best way to avoid interest charges. Also, it never hurts to shop around for a new card. You may be able to find a lower rate, or a card with a promotional 0% APR. If you do, pay down your balance completely before the promotional period ends.

Student loans

Many Americans take out federal student loans to help pay for college. If you are already in college or have graduated, your loans likely have a fixed interest rate, CNBC reported. This is because the majority of student loans are federally funded; just 7.5% are private loans. These can either carry fixed or adjustable rates. If yours is an adjustable-rate loan, the federal funds rate hike will have a bigger impact.

Additionally, prospective scholars who plan to take out loans in the next year or so might see rates that are a little bit higher. Federal student loan rates are determined by taking into account the 10-year Treasury yield. This measure has been inching higher lately, especially since the presidential election. The change in the federal funds rate will most likely push the Treasury yield even higher, pulling student loan interest rates with it.

How you can save

Unfortunately, there's not much someone looking to take out a new loan can do to avoid higher interest rates, other than research affordable options to make an informed decision.

However, if you have a variable-rate student loan now, you could consider refinancing for a fixed low rate. According to Stephen Dash, CEO of Credible.com, a website that offers information on how to refinance student loans, the average borrower can lower their rates by 1.7 percentage points through refinancing, CNBC reported. If you have several student loans, variable-rate or not, you can also consolidate them. This can make payments a little bit less complicated, plus you may lower your interest rate.

The effects of the rate hike won't be apparent right away, but it's clear that most interest rates will begin to edge upward over the coming weeks, months and years. If you're considering taking out a loan or a mortgage, you might be able to save some money by signing on sooner rather than later.

Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.