The days of bottoming rates are almost over.
The central bank will active relaxation Bond purchases last year were earlier than initially expected after recent reports on inflation continued to show strong prices.
While the Federal Reserve said Wednesday that interest rates will stay near zero for the time being, reduce bond purchases is considered the first step on the road to raising interest rates next year.
“For consumers, interest rates are likely to start rising in 2022,” said Greg McBride, lead financial analyst at Bankrate.com.
The federal funds rate, set by the central bank, is the rate at which banks borrow and lend to each other overnight. While that’s not what consumers pay, the Fed’s move still affects the savings and loan rates they see on a daily basis.
“The reduction in long-term asset purchases is likely to reflect a faster rise in long-term interest rates, and that should weigh on going forward,” said Yiming Ma, assistant professor of finance at Columbia University Business School. borrow and save.
Since the start of the pandemic, the Fed’s historically low borrowing rates have made it easier to access cheaper loans and less likely to hoard cash.
Now that the central bank’s easy money policies are coming to an end, consumers will have to pay more to borrow. Some already have.
Borrowing costs increase
As Fed ramps up bond purchases, long-term fixed mortgage interest rate will be higher, as they are affected by the economy and inflation.
For example, the average 30-year fixed-rate home mortgage has gone up to 3.24% and is likely to increase to nearly 4% by the end of 2022, according to Jacob Channel, senior economic analyst at LendingTree.
The same $300,000, 30-year, fixed-rate mortgage will cost you about $1,297 a month at a 3.2% rate, while it will cost you $1,432 at a 4% rate. That’s a difference of $135 a month, or $1,620 a year, and $48,600 over the life of the loan, according to LendingTree.
Fortunately, there’s still time for refinancers with good credit to get rates below 3%, Channel added, even if those days are numbered.
Currently, borrowers who refinance and have a good credit score can expect to find an APR of about 2.65% on a 30-year fixed-rate refinance loan and 2.35% on a 15-year loan. fixed interest rate, according to Lending Tree.
“Refinancing a mortgage can still cut your monthly payments by $100 to $200, and that provides valuable breathing room when the costs of so many other things are going up,” said Bankrate’s McBride speak.
Once the federal funds rate rises, so will the prime rate and homeowners with adjustable-rate mortgages or home ownership line of credit, which is tied to the base rate, may also be affected.
But there’s also an upside here: “Because higher rates are likely to reduce demand for new housing, homebuyers will likely find themselves with more housing options to choose from by 2022.” “, said Channel.
And “even at 4%, the rate will still be relatively low from a historical perspective,” he added.
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Other types of short-term loan interest rates, especially for credit, also still cheap by historical standards.
Credit card rates currently at around 16.3%, down from a high of 17.85%, according to Bankrate. Since most credit cards have variable rates, which are directly linked to the Fed’s benchmark, those rates won’t change much until the Fed makes a move.
However, “the prospect of rising interest rates in the not-too-distant future means that this is really important for those focused on reducing their card debt today,” said Matt Schulz, chief analyst. LendingTree’s credit said.
If you owe $5,000 on a credit card with an APR of 19% and putting $250 a month into the balance, it will take 25 months to pay off and you pay $1,060 in interest. If the APR goes up to 20%, you’ll pay an extra $73 in interest alone.
The good news here is that there are still a lot of offers for zero balance transfers, Schulz said.
Cards that offer 15, 18, and even 21-month terms with no interest on transferred balances are “absolutely worth considering for those in deep debt.”
The savings rate has barely changed
Because save, that’s another story.
The Fed has no direct influence on deposit rates; however, those tend to correlate with changes in the target federal funds rate. The result is, savings account rates at some of the largest retail banks already hovering near the rock bottom, the average is now just 0.06%.
Furthermore, when the Fed raises the benchmark interest rate, deposit rates will respond much more slowly and even then, only gradually increase.
If you have $10,000 in a regular savings account, earn 0.06%, you will only earn $6 interest in one year. According to Ken Tumin, founder of DepositAccounts.com, in an average online savings account that pays 0.46%, you can earn $46, while a 5-year CD can pay almost twice pair.
However, because the inflation rate is higher than all of these, savings lose purchasing power over time.
“For consumers who are sending money, it’s good to keep an eye on other options, Columbia’s Ma advises, such as ‘money market funds, bond mutual funds or bond ETFs. “
There are alternatives that will require more risk taking but come with ever-increasing returns, she said.
“Banks are notoriously slow to increase the amount depositors can earn from their accounts,” added Ma. “It might make sense to consider different options.”
