By Eric Gozenput. Originally published at ValueWalk.
For the month of March, the Federal Reserve initiated its first interest rate in response to the country’s economic performance. This marks the first interest rate hike since 2018, with the new rate rising by .25% – still relatively low compared to pre-pandemic rates. The interest rate determines the rate banks will pay for borrowing money from the Fed, which in turn affects the amount citizens will pay when needing a loan.
At the beginning of the COVID-19 pandemic in 2020, the Fed lowered interest rates to 0%-0.25%, allowing borrowers to take advantage of record-low mortgage, auto loan, and credit card rates, which helped encourage spending. Unfortunately, higher spending accelerated inflation due to increased demand for goods. This caused supplies to diminish while prices rose to record levels. Now the Fed aims to cut back on the supply of money by making it more expensive to borrow.
Mortgage rates started to rise right after the Fed announced it would increase interest rates, causing many would-be home buyers to forgo buying a house. As of March 17, mortgage rates are set at 4.719% for a 30-year mortgage, up from 3% a year ago. This can change since mortgage rates closely track 10-year Treasury notes, which can help bring down mortgage rates occasionally.
Home Equity Lines
Home equity lines of credit (HELOCs) interest rates move according to Federal Reserve fund rates. Usually, many homeowners will refinance their homes in order to take advantage of lower interest rates. Currently, with higher interest rates, homeowners might refrain from home equity lines. Alternately, many homeowners take out home equity loans for cash. Homeowners might face smaller cash-out loan amounts and higher interest rates which will have higher monthly payments.
All credit card users will experience a rise in their variable interest rates, which will be evident within one to two billing cycles. Credit card debt, which can be a drag on finances, has reached record highs for Americans. If you carry a balance, prepare to pay more interest on it. Depending on your credit history with the credit card issuer, you might be able to renegotiate a lower interest rate.
Most auto loans will not be affected by the new Fed rate. Since automakers are highly competitive and provide their own financing, rates can remain low. Make sure to shop around for auto loans to get the best rate.
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