As the Fed keeps rates close to zero for now, what does this mean for you?

As the Fed keeps rates close to zero for now, what does this mean for you?

although With the Federal Reserve not raising its key rate on Wednesday, your borrowing costs could still be high.

The rise in prices due to the economic recovery paves the way for the central bank to reduce bond purchases compared to last year. While the central bank has said interest rates will stay close to zero for now, the decrease in bond purchases is seen as the first step on the path to an interest rate hike.

And that, on its own, can affect the rate you pay on your mortgage, credit card, and car loan.

“Yields will increase in the medium to long term, which will translate into higher borrowing costs,” said Yiming Ma, assistant professor of finance at Columbia University Business School.

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Right now, homeowners have a unique opportunity to refinance or withdraw money from their homes at record rates.

According to Bankrate, the 30-year average fixed rate home loan is around 3.03%, the lowest since February.

“Refinancing is the most efficient step most families can take,” said Greg McBride, chief financial analyst at Bankrate.com.

“The ability to reduce your monthly payment by $ 200 frees up a bit of space at a time when so many other costs are rising. “

Once the Fed begins to slow the pace of bond purchases, long-term fixed mortgage rates will inevitably rise as they are affected by the economy and inflation.

As the Fed signals a move away from its easy money policy, “So it is likely that this will mean it will go into a rate hike cycle soon,” Ma said.

“It can also be directly factored into short-term rates,” she said. “It is understood that one will follow the other.

Many homeowners with variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, may be affected. When the federal funds rate increases, the prime rate will also increase.

Card prices are likely to remain high without any help from Washington, DC

Matt Schulzo

Chief Credit Analyst for LendingTree

The same goes for other types of short term loans, especially credit cards.

According to Bankrate, credit card rates are now as low as 16.21%, down from 17.85%, but most credit cards have a variable rate, which means there is a direct correlation with the rate. Fed benchmark.

“They’ve really risen since the Fed cut rates in March 2020,” said Matt Schulz, chief credit analyst at LendingTree.

“The rates are still much lower than they were before the pandemic, but over time these little movements really add up,” he said. “And with the current economic uncertainty, it is likely that card rates will remain high even without any help from Washington, DC.”

Borrowers should call their card issuer and request a lower rate, switch to a credit card with zero interest balance transfer, or pay off a high interest credit card with a home equity loan or personal loan, Schultz advised. . Given.

Currently, the average interest rate on a personal loan is less than 10.46% and a home equity line of credit is as low as 3.88%. Anyone who buys a car will see a similar trend with auto loans. According to Bankrate, the average five-year new auto loan rate is less than 3.95%.

“It could be a good tailwind to help you get out of debt,” McBride said.

Even student loan borrowers are nearing the end of their hiatus on federal student loan payments, which the US Department of Education has introduced since the start of the pandemic. (If you’re still unemployed or struggling financially due to COVID, there are other options for dealing with college debt.)

Only savers can benefit when rates start to rise, even if it happens very slowly.

The Fed has no direct effect on deposit rates; However, they tend to be correlated with changes in the target federal funds rate. As a result, the average yield on online savings accounts fell from 1.75% to 0.45% as the Fed lowered its benchmark rate to near zero, according to Ken Tumin, founder of DepositAccounts.com.

Some of the larger retail banks have even lower savings account rates, averaging just 0.06%.

“Based on the history from 2015 to 2017, no significant increase in savings account rates is expected as long as the Fed is on track with rate hikes,” Tumin said.

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