Uncertainty looms ahead as we transition into 2019. But one thing remains clear: Borrowing costs — at least for now — are still going up.
The Federal Reserve rattled markets by raising its benchmark interest rate in December, bringing the total number of rate hikes in 2018 to four. Short-term interest rates will keep climbing, but the central bank signaled that there could be two interest rate increases this year instead of the three it previously projected.
Expect more volatility as the stock market responds to the daily news cycle, says Greg McBride, CFA, Bankrate’s chief financial analyst. It all depends on how trade talks with China play out, but in the first quarter, McBride says we’ll probably see a strong market rally of more than 10 percent followed by a return to bear market territory for the S&P 500. As the year progresses, the economy is expected to slow while fears of an impending recession will grow.
Though policymakers have suggested that the next Fed rate hike may not happen for another several months, borrowers with outstanding balances should be prepared to pay more out of pocket. Whether you’re struggling to get rid of high-interest credit card debt or preparing to buy a new house or car, here’s what rising interest rates could mean for your wallet.
Mortgage rates headed back up
Mortgage rates have fallen in recent weeks amid market fluctuations, trade tensions and other political concerns. But experts say that trend should soon reverse.
“After a sharp drop in December, markets are poised to rebound any moment given the solid underlying economic fundamentals, and this will take bond yields and mortgage rates back up,” McBride says. “When investors are ready to embrace risk assets again, that won’t be good news for mortgage rates.”
Many industry analysts expect the average rate for 30-year fixed mortgages to hit 5 percent in 2019. Currently, it’s around 4.7 percent. The 10-year Treasury yield — which mortgage rates tend to follow — could rise close to 3.5 percent before falling back down to 2.45 percent by the end of 2019, McBride says.
Mortgage rates rose almost a full percentage point over the course of 2018. But this year, rates shouldn’t jump back up too quickly and we should be in a steadier rate environment, says Mike Fratantoni, chief economist at the Mortgage Bankers Association.
“I would expect over the next couple of quarters we’ll get back on this path of low increases in rates,” Fratantoni says. “And honestly, I expect that we’re going to be in a pretty good position for the spring housing market with rates a little bit lower than we have seen just a few months ago (and) more inventory in the market.”
As the Fed trims its balance sheet and pushes up short-term interest rates, McBride believes mortgage rates will pass 5.25 percent. Eventually, they’ll dip, he says, with the average rate for 30-year fixed mortgages falling to 4.35 percent as we close out 2019.
Home equity borrowers will pay a bit more
The latest Fed rate hike doesn’t mean much for homeowners with fixed-rate mortgages. But if you have an adjustable-rate mortgage with a rate that will soon adjust or a home equity line of credit, your interest rate is probably going up.
Most HELOCs are tied to the prime rate, which follows the Federal Reserve’s benchmark rate. Since the central bank raised rates by a quarter of a percentage point in December, the prime rate went up by the same amount.
“Each rate hike means the minimum payment on a $30,000 home equity line increases by $6,” McBride says. “I expect the Fed to raise rates twice next year, bringing the increase in minimum payments to $12.50 per month by year end.”
HELOC rates will rise and then flatten out, McBride says. He expects the average HELOC rate to reach 6.85 percent by the end of 2019. Borrowers concerned about rising monthly payments can refinance and choose a fixed-rate loan. Or they can ask lenders to freeze the interest rate tied to their unpaid balances. Either way, there are steps you may need to take to qualify for one of those options.
“Pull copies of your credit report to make sure there are no errors that would drag down your credit score,” McBride says. “Pay down other debt so your debt ratio is in line, and most importantly, stay current on all of your obligations.”
Slight jump in credit card interest payments
Credit card holders carrying a balance will also pay a bit more following the latest Fed rate hike. Bankrate data shows that average credit card rates are about 17.6 percent. By the end of 2019, McBride predicts that they’ll hit 18.1 percent.
Even with two additional Fed rate hikes potentially on the horizon, however, the impact on credit card holders should be minimal.
“I expect rates to rise one-half percentage point in response to two Fed hikes, but because of minimum payments, the household budget impact is muted,” McBride explains. “On a $10,000 balance, that would only increase the minimum monthly payment by $4.”
Still, there are solutions if you’re feeling insecure about the amount of credit card debt you’re sitting on. A balance transfer credit card, for example, can save you money, and the best cards have a zero percent introductory offer that applies for 15 months or more.
Auto loan rates moving higher
Car buyers will see interest rates rise as well before they begin to plateau.
For folks interested in new cars, rates for five-year auto loans are just under 5 percent. With two Fed rate hikes in 2019, McBride expects the average five-year new car loan rate to rise to 5.5 percent. The average four-year used car loan rate, he says, could hit 6.4 percent.
The best new car loan rates will be in the low to mid-4s, and the best used car rates will be in the high 4s, McBride says. Of course, to qualify for those kinds of rates, you’ll need a good credit score.
Experts indicate that 2018 was a good year for the auto industry, but as rates rise, affordability will remain a growing concern among consumers.
“A record number of lessees returning to the market should help give dealers a boost in the new year, but rising interest rates and vehicle costs are going to continue to give car shoppers pause and create uncertainty in the market,” said Jeremy Acevedo, Edmunds’ manager of industry analysis, in a press release.
Savers finally win
Though borrowers have reason to proceed with caution as they move into 2019, savers shouldn’t be too worried. After years of low yields, the rates tied to the best savings accounts finally beat inflation.
Online banks have been slowly lifting their deposit rates off the ground, and the best savings and money market account rates available to customers across the country pay 2.25 percent APY or more. CD rates have moved up as well, but with the flattening yield curve, long-term CDs aren’t paying that much more than midterm CDs these days.
Top-yielding online savings account yields could reach 3 percent APY in 2019 but then fall slightly (to 2.9 percent APY by the end of the year) as the economy slows down, McBride says. Average yields for one-year and five-year CDs could finish the year at 1.2 percent APY and 1.6 percent APY, respectively, McBride says.