This Is How Much the Fed's Interest Rate Hike Might Cost You

By Dan Rafter on 16 December 2015 0 comments

As expected, the Federal Reserve raised its benchmark interest rate today, ever so slightly, for the first time since 2006, before the economy crashed in 2008. The Fed hasn't done this since the economic meltdown largely to encourage consumers to continue to borrow, even as the economy struggled.

Consumers who needed to borrow money for cars or homes, for instance, enjoyed historically low interest rates. Now that the Fed has boosted its federal fund rate, those low rates will rise, at least by a little. Consider mortgage interest rates. The Freddie Mac Primary Mortgage Market Survey in early December found that the average interest rate on a 30-year fixed-rate mortgage loan stood at 3.93%. This rate was an even lower 3.16% for 15-year fixed-rate loans.

These are historically low rates. Before the economic crash, interest rates of 6% or 7% on 30-year fixed-rate mortgage loans were considered good. This is likely going to pain many borrowers who have little experience with a world in which interest rates are higher, said Michael Brady, president of Generosity Wealth Management in Boulder, Colorado.

"There is a whole generation of borrowers who think that these low interest rates are the norm," Brady said. "They don't understand what these rates used to be like. We have become used to interest rates decreasing. We will have to adjust our way of thinking about rates."

Mortgage Interest Rates to Rise?

The higher mortgage rates that will come after the Fed rate hike will make life more expensive for borrowers. Even a small increase in mortgage rates can make a significant impact in your monthly mortgage payment.

Say you take out a $200,000 30-year fixed-rate mortgage loan today with an interest rate of 3.9%. Your total monthly payment will be about $943, not including what you'd pay for property taxes and homeowners insurance.

But if the interest rate on that same loan jumps to 4.7%, your monthly payment — again not including taxes or insurance — will rise to about $1,037. That's a difference of about $94 every month, or about $1,100 a year.

The higher interest rates might also make it more difficult for you to qualify for a home loan. That's because higher rates equal higher monthly payments. You might have to choose a smaller home than you would have if interest rates didn't jump.

A Hurt on All Borrowers

When Brady says that borrowers will lose when interest rates rise, it's because mortgage loans aren't all that will become more expensive. So will auto loans, personal loans, and small business loans.

"When interest rates decrease, the costs to borrow for car loans, credit cards, and mortgages all become cheaper," Brady said. "Now we are talking about the opposite, so the things we saw get cheaper will become more expensive."

If you want to buy a car, that tiny 1.9% interest rate might soon jump. If you want to expand your small business and you need a loan to do so? Expect your monthly loan payments to jump as soon as interest rates rise.

Credit Card Debt Gets Even Worse

It's never a smart idea to carry credit card debt. But once the Fed raises its rate, carrying credit card debt will get even more expensive.

Expect the interest rates attached to credit cards, already high, to get even higher. Most consumers today carry cards that come with variable interest rates. These rates can change according to what is happening in the economy. If the Fed raises its rate, credit card providers will boost yours, too.

This can be a tough financial blow. Say you have credit card debt of $5,000 at an interest rate of 15.8%, and you make the minimum required payment of $200 every month. It will take you 10 years and six months to pay off that debt, if you don't make any new purchases with that card.

But if the interest rate on that same debt rises to 21.2%, it will take you 12 years and four months to pay it off.

A Bit of Good News?

It's not all bad news. If you have money saved in CDs or savings accounts, you should see higher returns once the Fed raises its rate. Investing in new bonds and other fixed-income investments will also become more attractive.

Since the Fed lowered rates, the interest rates on CDs and savings accounts have been at historic lows. The FDIC reported that the national average rate on savings accounts was a paltry 0.06% as of November 16. Expect that figure to rise — and the interest you earn on your savings to increase, too — if the Fed does indeed raise its federal fund rate this December.

How will you deal with the end of the era of super cheap credit?

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