What the Fed’s interest rates mean for mortgages, credit cards and more

What the Fed's interest rates mean for mortgages, credit cards and more

After raising interest rates 10 times over the past 15 months, the Federal Reserve took a break on Wednesday and held rates steady – at least for the time being. But the cumulative effects of previous rate hikes will continue to squeeze the budgets of debt-laden Americans, while rewarding them for putting money into savings.

The Federal Reserve has already raised its benchmark rate, the federal funds rate, to a range of 5 to 5.25 percent to rein in inflation, which is showing signs of slowing. But prices remain high — and the Fed may ultimately decide to raise rates twice more this year, according to forecasts published by policymakers on Wednesday.

That means credit card and mortgage costs could continue to climb, making it more difficult for people who want to pay off debt – as well as those looking to renovate their kitchen or buy a new car. want to take loan.

“We were screwed for a while with low rates, and it lulled us into a false sense of security about what the true cost of loans could be,” said Anna N’G-Konte, president of Re-Envision Wealth. Is.” a wealth management firm.

Here’s how the Fed’s decisions affect individual rates — and where they are now.

Credit card rates are closely tied to the Fed’s actions, meaning that consumers with revolving loans have seen those rates rise over the past year — and quickly (increases usually occur within one or two billing cycles).

According to Bankrate.com, the average credit card rate as of June 3 was 20.44 percent, up from about 16 percent last March, when the Fed began its series of rate hikes.

Those carrying credit card debt should focus on paying it off and assume that rates will keep rising. Zero-percent balance transfer offers can help if used carefully (they still Existence For those with good credit, but they come with fees, said Matt Schultz, LendingTree chief credit analyst, or you can try to negotiate a lower rate with your card issuer. His research Found that such a tactic often works.

Experts said higher loan rates are driving down auto sales, especially in the used car market, as loans are more expensive and prices remain high. Qualifying for a car loan has also become more challenging than it was a year ago.

“There are challenges with affordability in the vehicle market,” said Jonathan Smoak, chief economist at market research firm Cox Automotive.

According to Edmunds.com, the average rate on new car loans was 7.1 percent in May. 5.1 last year percentage. Used-car rates were even higher: The average loan rate was 11 percent in May, up from 8.2 percent a year earlier.

Car loans track the five-year Treasury note, which is affected by the Fed’s key rate — but it’s not the only factor that determines how much you’ll pay. A borrower’s credit history, vehicle type, loan term and down payment are all baked into that rate calculation.

Rates on the 30-year fixed-rate mortgage do not move in line with the Fed’s benchmark rate, but generally track the yield on the 10-year Treasury bond, which is affected by a variety of factors, including the rate around inflation. Includes expectations, Fed actions and how investors react to it all.

Mortgage rates have been volatile. After climbing above 7 percent in late October – the first time since 2002 – mortgage rates fell to near 6 percent in February before rising again to 6.71 percent. June 8According to Freddie Mac. The average rate for the same loan in 2022 for the same week was 5.23 percent.

Other home loans hew more closely to the Fed’s moves. Home-equity lines of credit and adjustable-rate mortgages — each of which carries variable interest rates — typically increase within two billing cycles after the Fed changes rates. According to Bankrate.com, the average rate on home-equity loans was 8.48 percent as of June 7, up from 4.45 percent a year earlier.

Borrowers who already hold federal student loans are not affected by the Fed’s actions because that loan has a fixed rate prescribed by the Government. (Payments on most of these loans have been halted for the past three years as part of a pandemic relief measure, and are set to resume by the end of summer.)

But new batches of federal student loans are priced each July based on the 10-year Treasury bond auction in May. and they loan rates have gone upBorrowers with federal graduate loans disbursed after July 1 (and before July 1, 2024) will pay 5.5 percent, up from 4.99 percent for loans disbursed in the year-ago period. Just three years ago, rates were below 3 percent.

Graduate students who take out federal loans will also pay about a half-point more, or about 7.05 percent on average, as will parents who average 8.05 percent.

Borrowers of private student loans have already seen rates climb thanks to the prior hike. Both fixed- and variable-rate loans are linked to benchmarks that track the federal funds rate.

Savers seeking a better return on their money had an easier time: Rates on online savings accounts with one-year certificates of deposit have reached their highest levels in more than a decade. But the pace of those increases is slowing down.

“Consumers now have several options for earning yields in excess of 5 percent on their cash,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.

An increase in the Fed’s key rate often means that banks will pay more interest on their deposits, although this does not always happen immediately. When they want to bring in more money, they raise their rates.

The average yield on an online savings account was 3.98 percent as of June 1, up from 0.73 percent a year earlier, according to DepositAccounts.com. But the yields on money market funds offered by brokerage firms are even more attractive because they more closely track the federal funds rate. The yield on the Crane 100 Money Fund Index, which tracks the largest money market funds, was recently at 4.91 per cent.

Rates on certificates of deposit, which track similarly dated Treasury securities, are also ticking higher. average one year CDs at online banks stood at 4.86 percent as of June 1, up from 1.49 percent a year earlier, according to DepositAccounts.com.

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