December 28, 2018
What Rising Interest Rates Really Mean…to You
The Federal Reserve interest hikes. Sure, it’s not exactly the most interesting topic to read about, especially at a time when we’re seeing breakthrough photos of Mars or experiencing “Out of This World” holiday sales. But the fact is, rising federal interest rates is a topic that really does affect your world, or more importantly, your wallet. Here to shed some light on rising interest rates and why they should be of great interest to you is Avidia’s Real Smart expert, Don Frost, Senior Vice President of Residential Lending.
Real Smarts: Welcome Don. Let’s start by asking you to define for us, in terms that won’t confuse us, or worse, put us to sleep, what exactly is the Fed Funds rate?
Don: It’s actually the interest rate banks charge each other to lend money to each other overnight. When the rate rises, it means it costs banks more money to borrow and as a result, they raise short-term loan interest rates to borrowers to pass on the cost. Today, the actual rate is 2.25% and it is expected to rise several times over the coming year.
Real Smarts: What rates are impacted by Fed Funds rate increases?
Don: The Fed Funds rate really affects short-term rates. For consumers, that means the interest rates you pay for short-term borrowing will increase every time the rate gets raised by the Federal Reserve. A great example is the variable rate of interest you pay on your credit card. An increase in the Fed funds rate could result in an increase on your interest rate, say from 16% APR to 18%. And of course, a higher interest rate means that your monthly payments will increase.
Real Smarts: In addition to credit cards, what other rates may rise?
Don: If you have a home equity line with a variable rate that is based on an index, such as the Prime rate (currently 5.25% as of 12/1/18), your interest rate will also rise when the Fed raises short-term rates. Again, an increase in interest, means an increase in your monthly payment.
Real Smarts: Have mortgage rates increased as a result of rising Fed rates?
Don: Again, the Fed Funds rate is based on short-term rates. Longer-term rates, such as 30-year fixed-rate mortgages haven’t really been impacted. Adjustable-rate mortgages (ARMs), however, will increase in a rising rate environment.
Real Smarts: Does the rising rate environment make this a good or bad time to buy or refinance a home?
Don: Actually, because 30-year mortgage rates have been unaffected, it is still a good time to buy or refinance a home. It’s also a great time to refinance a variable-rate mortgage to a fixed-rate mortgage to take advantage of lower rates and get the assurance of fixed monthly payments.
Real Smarts: What advice do you have for consumers in a rising federal rate environment?
Don: Well with rates expected to continue to rise in 2019, I think it’s critical to pay down any existing debt you may have. If you have credit card debt, try to transfer your balances to a lower-interest card. Always pay off higher-interest debt first and try to avoid running up new debt. If you have a higher interest rate on a fixed-rate mortgage or have an adjustable-rate mortgage, you may want to look at refinancing.
Real Smarts: How do I know if refinancing makes sense for me?
Don: The decision to refinance is based on many factors – your current rate, how long you plan to live in the home, etc. We’d be happy to help you decide if it makes sense for you. Just stop by any Avidia branch or give me a call at 978-567-3659. You can always email me directly as well.
*This article was published on January 9, 2019 and reflects the interest rate environment at that time.