June 16, 2017 in Federal Reserve

Fed rate hike: Are you a winner or a loser?

Are you a financial winner or loser as a result of the Federal Reserve’s rate increase? It depends on whether you’re asking as a homebuyer, a homeowner with equity, a credit cardholder, a vehicle owner making car payments or a saver. Here’s the scoop.


Mortgages

Mortgage rates tend to move up or down even before the Fed makes its rate moves. This time, mortgage rates moved down, even though investors felt confident that the central bank would hike rates. That was partly in reaction to global events, and partly because inflation doesn’t seem a threat. Inflation is tame, the Fed is fighting it anyway by raising rates, and that combo makes it easy to find a great mortgage deal.

Winners:

People who got fixed-rate mortgages in the three months leading up to the Fed meeting have been winners because mortgage rates eased down from 4.44 percent March 15 to 4.04 percent June 7.

Housing economists expect mortgage rates to rise over the next six months, but not by a lot. Rates almost certainly will remain low by historical standards, so people who shop successfully for a mortgage this year can count themselves as winners. For perspective, consider that the 30-year fixed averaged 6.74 percent 10 years ago, in June 2007.

Losers:

Homeowners with adjustable-rate mortgages, or ARMs, might end up with bigger house payments when the next rate adjustment rolls around. ARMs are tied to indexes that are sensitive to Federal Reserve rate moves.


Home equity

Got a home equity line of credit? Get ready for your fourth rate increase since December 2015 and the third hike in just six months. Comparison-shop home equity lines so you can get cash to pay for home renovations or other financial needs.

Losers:

Rates on home equity lines of credit, or HELOCs, will rise a quarter of a percentage point. Expect it to hit your wallet within 30 days, or by the second billing statement after the Fed’s hike. Virtually all HELOCs are linked to the prime rate. The Fed’s action immediately raises the prime rate by one-quarter of a percentage point, to 4.25 percent.

Winners:

Many HELOCs have a feature that lets you set aside a portion of the amount you borrow, take a fixed rate on that and then pay it down. Those fixed rates won’t change.

Or, if you have a fixed-rate home equity loan, your interest rate won’t change.


Credit cards

Many variable-rate credit cards are tied to movement in the prime rate, which is tied to the Fed’s federal funds rate. So, yes, when that goes up, your credit card’s annual percentage rate is likely to rise as well.

Winners:

“Only if you carry a balance is this really going to be an issue,” says Eric Lindeen, vice president of marketing at ID Analytics, a risk management firm.

The added revenue from credit card interest could ultimately allow financial institutions to reintroduce more competitive deposit products. In other words, “the biggest winners are going to be those that are saving rather than borrowing,” Lindeen says.

If you need to carry balances month-to-month, find a low-rate credit card today.

Losers:

If you’re carrying a balance on a variable-rate card, “it’s time to hustle up and get (debts) paid down,” says Greg McBride, CFA, senior vice president and chief financial analyst at Bankrate.

And, shop now for the best balance transfer cards before credit cards with 0 percent interest rate offers become scarcer.


CDs and money market accounts

Savers might wonder when rates will finally go back to something resembling normal. The most likely answer: not soon.

Winners:

Savers can expect get their fourth rate raise in 18 months, making it more attractive to shop for high-yield certificates of deposit.

Fed rate hikes typically mean some increase in interest rates on savings accounts and CDs, says Don Kohn, a former Fed vice chairman and now a senior fellow at the Brookings Institution.

“At least some of it will get passed through in deposit rates, with a lag,” Kohn says.

Losers:

The Fed’s relatively measly rate hike isn’t going to do much to help savers generate meaningful income or compounding returns. And, the Fed may still take a long time to bring rates back up anywhere near their pre-recession levels.

If you bit the bullet and opened a multiyear CD recently and it wasn’t a rising-rate CD, you’re going to have to grit your teeth and accept a lower rate until it matures, or risk paying a potentially hefty early withdrawal penalty.


Auto loans

The Fed’s action will tap the gas on auto loan interest rates, though they’re not likely to accelerate too much.

Losers:

Auto loan rates don’t move in lockstep with interest rates set by the Federal Reserve, but they do follow the trend set by the central bank — and rates have moved up since last summer.

Interest rate rises will be gradual but unstoppable, so the sooner you get an auto loan, the better. Toward the end of 2016, shoppers could snag rates below 3 percent on 48-month new car loans. Now those are rare in many markets.

Winners:

Shopping around for car loans and improving your credit rating can win a great rate no matter what the Fed does.

“A couple of quarter-point rate moves by the Fed are small potatoes by comparison,” says Bankrate’s McBride. “A rate hike has virtually zero impact on auto loan affordability, with a quarter-point hike meaning a difference of $3 in monthly payment. Nobody will have to downsize from the SUV to the compact based on rising interest rates.”