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What Does The Interest Rate Hike Mean To You

What Does The Interest Rate Hike Mean To You

The Federal Reserve raised rates on May 4th, 2022 by half a percentage point, the highest move in 20 years and the most aggressive move in its fight against a 40-year high in inflation. But what does this all mean to you?

  1. Borrowing costs more – Prioritize paying down your debts, especially anything with variable short-term borrowing rates such as credit cards. We know the banks won’t hesitate to raise these rates swiftly. Ideally, pay down your balances diligently every month.

  2. Home equity lines of credit – These will adjust immediately. Consider paying these down as soon as possible.

  3. Adjustable-rate mortgages – ARMs adjust once a year, so you may have a slightly longer wait time to feel the pinch here.

  4. Homebuyers – Longer-term fixed mortgage rates are tied to Treasury yields, not federal funds rate hikes but don’t be fooled, as most mortgage companies have embedded the hikes into their interest rate. A 30-year fixed-rate mortgage is currently above 5% and will possibly creep higher towards the end of the year. The bottom line is that you’re probably paying more for a home loan.

  5. Private student loans – the increase in interest rates will depend on whether you have a variable rate and its specific benchmark (Libor, prime, or T-bill rates).

  6. Savings – Eventually (always far too late in my opinion), your savings will earn more. However, as inflation is higher than probably any of the rates offered, your money will still lose purchasing power over time. It’s still worth shopping around for the top-yielding savings accounts**

  7. Federal student loans – These loans are fixed, so most borrowers won’t be impacted immediately by a rate hike.

  8. Auto loans – These loans are fixed, but the price for all cars is rising (supply shortages, component price increases), so the loan amount will be more in the months ahead.

**I bonds are paying a 9.625% annual rate through October 2022, the highest yield since being introduced in 1998. In comparison, savings accounts have a sub 1% yield, and one-year CDs are paying less than 1.5%. Read our recent blog posts to learn more: Using I Bonds as a Cash Management Tool 3 Ways Inflation Affects You

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