The days of the lowest interest rates are almost over.
The central bank will aggressively unwind last year’s bond purchases earlier than originally expected after recent inflation reports continued to show a sharp rise in prices.
While the Federal Reserve said on Wednesday that interest rates will stay close to zero for now, the rapid reduction in bond purchases is seen as the first step on the way to raising interest rates the next year.
“For consumers, the writing is on the wall that interest rates are likely to start climbing in 2022,” said Greg McBride, chief financial analyst at Bankrate.com.
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend each other on a day-to-day basis. While that’s not the rate consumers pay, the Fed’s measures still affect the borrowing and saving rates they see every day.
“The reduction in long-term asset purchases is likely to reflect a faster rise in long-term interest rates and this should affect borrowing and saving,” said Yiming Ma, assistant professor of finance at Columbia. University Business School.
Since the start of the pandemic, the Fed’s historically low borrowing rates have made it easier to access cheaper and less desirable loans for accumulating cash.
Now that the central bank‘s easy money policies come to an end, consumers will pay more to borrow. Some already are.
Borrowing costs rise
As the Fed cuts its bond purchases, long-term bonds mortgage rates will increase slightly as they are affected by the economy and inflation.
For example, the average mortgage at fixed rate over 30 years has already increased at 3.24%, and is expected to climb to nearly 4% by the end of 2022, according to Jacob Channel, senior economic analyst at LendingTree.
The same 30-year fixed-rate mortgage of $ 300,000 would cost you about $ 1,297 per month at 3.2%, while it would cost $ 1,432 at a rate of 4%. That’s a difference of $ 135 per month, or $ 1,620 per year, and $ 48,600 over the term of the loan, according to LendingTree.
Fortunately, there is still time for refinancers with good credit to get rates below 3%, Channel added, even though the days are numbered.
Currently, borrowers who refinance and have a good credit rating can expect to find APRs of around 2.65% for a 30-year fixed rate refinance loan and 2.35% for a fixed rate loan. fixed over 15 years, according to Lending Tree. .
“Refinancing a mortgage can further reduce $ 100 to $ 200 on your monthly payment, and this provides valuable leeway when the cost of so much else increases,” Bankrate’s McBride said.
Once the federal funds rate increases, the prime rate will also rise, and homeowners with adjustable rate mortgages or home equity lines of credit, which are indexed to the prime rate, could also be affected.
But there is also an advantage here: “Because higher rates are likely to reduce demand for new homes, potential buyers could end up with a greater choice of homes in 2022,” Channel said.
And “even at 4%, rates would still be relatively low from a historical point of view,” he added.
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Other types of short-term borrowing rates, especially on credit cards, are also still cheap by historical standards.
Credit card rates are currently around 16.3%, down from 17.85%, according to Bankrate. Since most credit cards have a floating rate, there is a direct link to the Fed’s benchmark, so those rates won’t change much until the Fed makes a move.
However, “the prospect of rising interest rates in the not-so-distant future means that it’s really, really important for people to focus on reducing their card debt today,” Matt said. Schulz, chief credit analyst for LendingTree.
If you owe $ 5,000 on a credit card with an APR of 19% and put $ 250 per month on the balance, it will take 25 months to pay it off and will cost you $ 1,060 in interest charges. If the APR reaches 20%, you’ll pay an additional $ 73 in interest only.
The good news here is that there are still plenty of zero percent balance transfer offers available, Schulz said.
Cards offering 15, 18 and even 21 months with no interest on transferred balances “are absolutely worth considering for anyone with high debt.”
Savings rates are barely moving
The Fed has no direct influence on deposit rates; however, these tend to be correlated with changes in the target federal funds rate. As a result, the rate of savings accounts at some of the largest retail banks hovered near the rock bottom, currently only 0.06% on average.
Moreover, when the Fed raises its benchmark rate, deposit rates are much slower to respond, and even then only gradually.
If you have $ 10,000 in a regular savings account, earning 0.06%, you will only earn $ 6 in interest in a year. According to Ken Tumin, founder of DepositAccounts.com, on an average online savings account paying 0.46%, you could earn $ 46, while a five-year CD could pay almost double.
However, since the inflation rate is now above all of these rates, savings money loses purchasing power over time.
“For consumers who deposit, it’s good to pay attention to other options,” Columbia’s Ma advised, “such as” money market funds, bond mutual funds or bond ETFs. “
There are alternatives that will require taking more risk but come with increasing returns, she said.
“Banks have been noticeably slow to increase what depositors can earn from their accounts,” added Ma. “It may make sense to look at different options.”