Americans will feel the impact when the Fed raises rates. Here’s what you need to know: NPR

The floor of the New York Stock Exchange this week, after the Federal Reserve announced a quarter-point hike in its key rate. The Fed is raising rates to curb inflation, but it will hit some Americans in their wallets.

Richard Drew/AP


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Richard Drew/AP


The floor of the New York Stock Exchange this week, after the Federal Reserve announced a quarter-point hike in its key rate. The Fed is raising rates to curb inflation, but it will hit some Americans in their wallets.

Richard Drew/AP

After years of very low interest rates, a change is coming. The Federal Reserve is raising rates. Borrowing will become more expensive for everything from mortgages to auto loans to credit cards. For many Americans, it will be a bitter pill. But there are some silver linings. Here’s what you can do in response.

It’s going to get even harder to buy your first home…for now.

When you’re buying something as expensive as a house, interest rates really matter. They have already jumped sharply in anticipation of the Fed’s much-heralded plan to raise rates throughout the year. Since last summer, mortgage rates have risen more than one percentage point to more than 4% on a 30-year fixed rate loan.

“It starts to push from like ‘maybe we could make it work’ to the point where you’re just like ‘it’s not worth it,'” says Zach Gubran of Fort Collins, Colorado.

Gubran, 33, and his partner would like to settle down and buy their own home. But he says that in this frenetic real estate market, it was already difficult.

And now, on a $450,000 loan, the jump in rates over 4% drives up the monthly payment by $325.

“It’s like this ridiculous situation,” says Gubran, who works as a contractor for a software company. “I have tens of thousands of dollars in savings, and I feel like it’s nothing, it doesn’t matter.”

But all is not hopeless. Rising rates could stop the runaway train of rising house prices

US home prices rose last year almost 20%. That’s a staggering one-year gain. With a historic shortage of homes for sale and rock-bottom interest rates, bidding wars have regularly erupted and driven prices up.

In recent years, big price gains like this have attracted more buyers who didn’t want to miss out, further boosting demand in the overheated market.

“Higher mortgage rates can be helpful in cooling the housing market,” says Selma Hepp, economist at CoreLogic. “It may help us get back to some level of normalcy, and in that case we won’t see as much bidding over the asking price.”

Don’t expect house prices to fall. But Hepp thinks that this year they will increase much less, around 3%. A few years like this could give builders time to catch up with demand and build more homes.

Ugh. Monthly payments on home equity lines of credit will increase

Ninety percent of homeowners have fixed rate mortgages. That’s the good news. They are protected against rising interest rates. But millions of Americans have borrowed against their homes. Together they must approx. 300 billion dollars home equity lines of credit (HELOC). Almost all have variable rates.

“Your rate will go up,” says Kate Wood, who tracks home loans for NerdWallet. “A home equity line of credit, those are really, really, really closely tied to the kind of action the Federal Reserve is taking.”

But Wood says that since these rates adjust as a result of Fed moves, more than home mortgages, and since the Fed has only just started raising rates, you still have at least some time to consider your options. Some banks will allow you to take the money you owe on your line of credit and lock it into a fixed interest rate.

“It’s worth proactively reaching out to your lender about this,” she says. “Think about it – this is something that potentially saves you money. Your lender may not be sending you, you know, letters and calling you to tell you about this great option with your HELOC.”

Savers will get a better return from bank CDs

For retirees and others who have considerable savings that they may need to spend, say, in a year or two, bank CDs have been a go-to option for generations. You don’t have to worry about the stock market crashing because you get all your money back, plus some interest.

The problem is that in recent years certificates of deposit have yielded almost nothing.

But now, with rates rising, we should start to see banks offering at least slightly higher rates on CDs, especially as the year progresses and the Fed continues to push rates higher.

There’s more: car loans, installment loans and credit cards

Most types of consumer debt, including auto loans, are expected to see rates rise in the coming year. Car prices have been particularly high during the coronavirus pandemic. So for car loans, it can be tempting for many people to take out a longer-term loan over seven years to lower their monthly payment.

But financial advisers say three- or five-year loans are a much better option, and they warn against those seven-year car loans. You end up paying a lot more interest. And cars lose value over time. So, in a few years, if you need a different car, you may end up with $5,000 or $10,000 more than your car is worth.

But some people will trade in their old car anyway. “And the loan balance rolls over to the new loan, which is crazy,” says Miguel Gomez, a certified financial planner in El Paso, Texas. “Now all of a sudden you buy another $30,000 car, but you owe $40,000 from the start, which is a very difficult cycle to break out of.”

Credit card debt is also a difficult cycle to stop. And with already high interest rates on credit cards going even higher, now is a good time to try paying off those credit cards.

“If you’re feeling stuck, credit counseling can really make a difference,” Gomez says. He mentions the National Foundation for Credit Counseling, a proven nonprofit organization that can help clients get out of debt.

And he says there is also a good technique you can try at home.

“Take your credit cards – put them in a Ziploc bag,” he says. “Then put it in a Tupperware container filled with water. Put it in the freezer and forget about them.”

That way, if you really need your credit cards, you always have them. But with your cards on ice, it definitely reduces impulse buying.

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