The cost of borrowing money to buy a home or a car or to pay for home improvements is going up and fast.
The Federal Reserve’s decision to boost interest rates by a half-point on Wednesday, the biggest increase since 2000, is one of what is expected to be several increases in rates in the coming months in an aggressive bid to take on inflation running at its highest rate in 40 years. The Fed previously boosted rates by a quarter-point.
Home prices: Columbus-area home prices see biggest jump since June
On top of raising rates, the Federal Reserve is withdrawing other liquidity from the financial system that has help keep interest rates super low for more a decade.
Both moves figure to boost the cost to borrow or run a balance on a credit card.
“It kind of speaks to the urgency in which the Fed has to act giving inflation is running so high. … The Fed is going to raise rates a bunch of times,” said Greg McBride, Bankrate.com’s chief analyst.
The Fed is betting that its moves will slow the economy and cool inflation. The risk is that the Fed will go too far and tip the economy into a recession.
McBride said the Fed seems intent on acting aggressively now in the hopes that it won’t have to do as many rate hikes in the future.
So what exactly does the Fed’s actions mean for your money?
Here are some questions and answers about the Fed’s rate hike:
What did the Fed do?
A: The Fed raised interest rates by half of a percentage point to between 0.75% and 1%. It also announced reductions in its ballooning $9 trillion balance sheet. Both moves are expected to lead to higher interest rates that consumers pay on mortgages, existing lines of credit and to finance purchases of vehicles and other consumer debt.
Why is the Fed acting?
A: In short, inflation. The cost of gasoline, groceries and other goods have been rising at the highest levels in more than four decades, eating up the raises that workers have earned over the past year.
What about buying a home?
A. Interest rates on a 30-year fixed mortgage have jumped 2 percentage points since the beginning of the year to above 5%, McBride said.
McBride said he doubts that the higher costs will do much to slow the rising price of a home for now given the tight inventors throughout the country.
But Lawrence Yun, chief economist of the National Association of Realtors, cautioned Wednesday that high rates have contributed to the cost of buying a home rising 55% over the past year.
“Mortgages now compared to just a few months ago are costing more money for home buyers,” he said in a news release. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”
Double-digit percentage increases in home prices and rents are a major factor for why inflation is running so hot, McBride noted.
What about a line of credit?
A: Those rates should go up in coming months and, a fixed rate mortgage, will absorb the full Fed action on rate hikes in coming months.
The average rate for a home equity line of credit is 4.15%, said Ted Rossman, a senior industry analyst at Bankrate. A half-point increase on a $50,000 credit line raises the minimum monthly payment by $21, he says. A 2-percentage-point increase the rest of the year would result in an $83 increase in the monthly tab.
What about buying a car?
A: Rising rates likely will boost car payments by a few dollars a month, McBride said. The average car buyer finances $37,000 on a vehicle.
What about credit card debt?
A: Like with lines of credit, financing credit card debt will go up as well.
Credit card rates are averaging 16.4%, according to Bankrate.com. For a $5,000 credit card balance, a half-point increase probably will add $193 in total interest for borrowers who make the minimum monthly payment, said Rossman.
A total of 2 percentage points in rate increases the rest of the year would add $800 in interest until the balance is paid off, Rossman says.
Q: With interest rates going up, will savers finally be able to collect more interest on their nest eggs?
A: Maybe. Savers hardly get anything on their savings, and McBride isn’t anticipating that to go up much at first given that big banks are carrying large deposits and don’t need to pay more to customers for holding that cash. Smaller banks and internet banks likely will pay more.
Information from USA Today is included in this report