Federal Reserve Interest Rate Increase
Federal Reserve Interest Rate Increase: What does this mean for you?
The long-awaited interest rate hike by the Federal Reserve was finally announced on December 16th, 2015. The Federal Reserve announced it would raise rates by a quarter of a percentage point, up from close to zero. While the increase was small, the move was significant. The last interest rate hike occurred in mid-2006. The decision to lower rates and keep them close to zero for so long was unprecedented, but was needed. Since 2007, when the country entered a financial crisis, the Federal Reserve continued to move rates lower in the hopes of boosting economic activity. The idea was the low rates would allow consumers and businesses to borrow and spend more.
Now, the economy looks stronger and is more stable, but how will this interest rate hike affect you? First and foremost, it will affect mortgages. Obviously, rates are going to go up. Most economists state they expect the conventional 30-year mortgage rate to rise in 2016. If you are already locked into a 30-year fixed mortgage, you have nothing to worry about. Most adjustable mortgage rates, however, are reset once per year. So, if rates rise a number of times before your next rate reset, you could end up paying more. An alternative would be to consider refinancing to a fixed rate loan, now, before long-term rates increase significantly. Your real estate agent can refer you to a lender who can walk you through these options.
Another area where you might feel the increase is with your credit cards. Similar to adjustable rate mortgages, credit card rates are likely to rise almost immediately. In turn, this will mean a higher annual percentage rate (APR) for many variable-rate credit card borrowers, which unfortunately is the predominant type of credit card agreement. Unlike other credit card rate increases, a 45-day notice from the credit card issuer is not required. The good news is some credit card rates have a ceiling. These credit card borrowers are already paying more than the prime rate, plus additional percentage points, so a small increase is not likely to affect the APR for these credit card borrowers. For consumers in this situation, experts have suggested obtaining a zero percent balance-transfer card and moving an outstanding balance there, giving the consumer up to 18 months to pay off the balance.
Another area of concern could be auto loans. As rates increase, the cost of borrowing to buy a new car rises. The result of a rate increase is consumers may decide to put off the purchase for now. The recent rate increase was small, however if future increases are on their way, car loans stand to become much more expensive.
Stocks and savings are another area to keep an eye on. Do not expect to start seeing 1-year CDs offering a 3 percent return anytime soon. The best rates (usually found at online banks) will barely budge, unless there are further increases in the coming months. Banks do not immediately pass on higher savings rates to their depositors. With stocks, it is never wise to make short-term stock market forecasts (and one year certainly counts as short term for prudent investors). Stocks typically do well in the year following an initial Federal Reserve rate hike, according to data crunched by Fidelity. Intuitively, this makes sense: Central bankers typically will not raise rates unless the economy is deemed healthy enough to tolerate an action which could slow the economy.
The most important takeaway here is if you are thinking about financing a home purchase, here in Southwest Florida in 2016, you may want to speed up the process. Waiting another year could bring another rate increase. Additionally, home prices in the Southwest Florida market are rising and this will certainly compound what you will be paying over the life of a mortgage if you wait. Those who waited in 2015 are now facing the higher rate in 2016. If you are selling, be prepared for buyers to see the increase when they pre-qualify.
No matter what side of the transaction you’re on in 2016, be sure to talk with your real estate agent further about what this recent increase means to you. This will ensure your agent can assist you in making the best decision possible for your 2016 real estate goals.
D. Michael Burke
Keller Williams Elite Realty
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