How Fed rate hike will affect mortgages, credit cards and auto loans

How the Fed rate hike will affect your family: Average mortgage payments to jump by $200 as higher borrowing costs make credit cards and auto loans even more expensive

  • Fed’s latest rate increase will raise borrowing costs for mortgages, credit cards and auto loans 
  • The rate increases have the biggest impact on the housing market, which is already cooling quickly
  • Average monthly payment for a 30-year fixed on a $400,000 home could rise about $200 
  • Anyone borrowing money to make a large purchase, such as a home, car, or large appliance, will take a hit 

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After the Federal Reserve raised its key rate once again, American families will face higher borrowing costs for mortgages, credit cards and auto loans. 

The Fed on Wednesday raised its policy rate by 75 basis points, to a range of 3 percent to 3.25 percent, in a push to cool the economy and tame inflation.

Higher rates are designed to slow inflation by reducing the supply of easy money — but by raising borrowing costs for families and businesses, the Fed risks triggering job losses and rising unemployment.

The rate increase will have the biggest impact on the housing market, and homebuying activity has already dropped off amid rising mortgage rates, which topped 6 percent last week for the first time since 2008. 

However, anyone borrowing money to make a large purchase, such as a home, car, or large appliance, will take a hit, according to Scott Hoyt, an analyst with Moody’s Analytics.

‘The new rate pretty dramatically increases your monthly payments and your cost,’ he said. ‘It also affects consumers who have a lot of credit card debt – that will hit right away.’

The Fed's projected rate hike for September is seen above. As the Federal Reserve raises its key rate once again, American families will face higher borrowing costs for mortgages, credit cards and auto loans

The Fed’s projected rate hike for September is seen above. As the Federal Reserve raises its key rate once again, American families will face higher borrowing costs for mortgages, credit cards and auto loans

Earlier this month, Fed Chair Powell acknowledged that aggressively raising interest rates would 'bring some pain'

Earlier this month, Fed Chair Powell acknowledged that aggressively raising interest rates would ‘bring some pain’

That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, though they have risen lately as pandemic restrictions on debt collection are lifted. 

The latest data show that the average US household is spending 9.5 percent of their disposable income to make debt payments, which remains below the pre-pandemic record low of 9.8 percent.

So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately.

‘I’m not sure interest rates are top of mind for most consumers right now,’ Hoyt said. ‘They seem more worried about groceries and what´s going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around.’

HOW WILL THIS IMPACT MORTGAGE RATES? 

Last week, the average fixed mortgage rate topped 6 percent, its highest point in 14 years, meaning that rates on home loans are about twice as expensive as they were a year ago.

At last week’s rate, the monthly payment on a 30-year fixed mortgage for a $400,000 home with 10 percent down would come in at $2,163. 

Adding another 75 basis points to the mortgage rate would increase the monthly payment by nearly $200, to $2,340. 

Last week, the average fixed mortgage rate topped 6 percent, its highest point in 14 years, meaning that rates on home loans are about twice as expensive as they were a year ago

Last week, the average fixed mortgage rate topped 6 percent, its highest point in 14 years, meaning that rates on home loans are about twice as expensive as they were a year ago

Rising mortgage rates have already had an impact on home sales volume, which has dropped off significantly as homebuyers shy away from higher borrowing costs and stubbornly high home prices.

U.S. existing home sales dropped for the seventh straight month in August, the National Association of Realtors said on Wednesday. 

‘The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes,’ said NAR Chief Economist Lawrence Yun. ‘The softness in home sales reflects this year’s escalating mortgage rates. 

Existing home sales slipped 0.4 percent to a seasonally adjusted annual rate of 4.80 million units last month, down 19.9 percent from a year ago. 

The national median home price jumped 7.7 percent in August from a year earlier, to $389,500. 

Amid higher rates, existing home sales slipped 0.4 percent in August to a seasonally adjusted annual rate of 4.80 million units last month, down 19.9 percent from a year ago

Amid higher rates, existing home sales slipped 0.4 percent in August to a seasonally adjusted annual rate of 4.80 million units last month, down 19.9 percent from a year ago

Median home prices remain stubbornly high though, up 7.7% from a year ago in August at $389,500

Median home prices remain stubbornly high though, up 7.7% from a year ago in August at $389,500

Mortgage rates don’t always move perfectly in tandem with the Fed increases, instead tracking the expected yield on the 10-year Treasury note. The yield on the 10-year Treasury note has reached nearly 3.6 percent, its highest level since 2011.

If you’re financially able to proceed with a home purchase, you´re likely to have more options than at any time in the past year. Sales of both new and existing homes have dropped steadily for months. 

Meanwhile, asking rents are up 11 percent from last year, said Daryl Fairweather, an economist with the brokerage Redfin. But price growth has slowed, and some renters are moving to more affordable areas.

HOW WILL THIS AFFECT CREDIT CARD RATES?

Even before the Fed’s decision Wednesday, credit card borrowing rates have reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.

And with inflation raging, there are signs that Americans are increasingly relying on credit cards to help maintain their spending. 

Total credit card balances have topped $900 billion, according to the Federal Reserve, a record high, though that amount isn´t adjusted for inflation.

John Leer, chief economist at Morning Consult, a survey research firm, said its polling suggests that more Americans are spending down the savings they accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.

Even before the Fed's decision Wednesday, credit card borrowing rates have reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise (file photo)

Even before the Fed’s decision Wednesday, credit card borrowing rates have reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise (file photo)

Those who don’t qualify for low-rate credit cards because of weak credit scores are already paying significantly higher interest on their balances, and they’ll continue to.

As rates have risen, zero percent loans marketed as ‘Buy Now, Pay Later’ have also become popular with consumers. 

Yet longer-term loans of more than four payments that these companies offer are subject to the same increased borrowing rates as credit cards.

For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which follows the Fed’s.

WHAT IF I WANT TO BUY A CAR?

Auto loans are at their highest levels since 2012, according to Bankrate.com’s Greg McBride. Rates on new auto loans are likely to go up by nearly as much as the Fed’s rate increase. 

That could knock some lower-income buyers out of the new-vehicle market, said Jessica Caldwell, executive director at Edmunds.com.

Caldwell added that the entire increase isn’t always passed on to consumers, because some automakers are subsidizing rates to attract buyers. 

Auto loans are at their highest levels since 2012, and rates on new auto loans are likely to go up by nearly as much as the Fed's latest rate increase (file photo)

Auto loans are at their highest levels since 2012, and rates on new auto loans are likely to go up by nearly as much as the Fed’s latest rate increase (file photo)

Bankrate.com says a 60-month new vehicle loan averaged just over 5 percent last week, up from 3.86 percent in January. A 48-month used vehicle loan was 5.6 percent, up from 4.4 percent in January.

Many lower-income buyers have already been priced out of the new-vehicle market, according to Caldwell. 

Automakers have been able to get top dollar for their vehicles because demand is high and supply is low. 

For more than a year, the industry has been grappling with a shortage of computer chips that has slowed factories worldwide.

WILL THIS AFFECT STUDENT LOANS?

Borrowers who take out new private student loans should prepare to pay more as as rates increase. 

The current range for federal loans is between about 5 percent and 7.5 percent.

That said, payments on federal student loans are suspended with zero interest until December 31 as part of an emergency measure put in place early in the pandemic. 

President Joe Biden has also announced some loan forgiveness, of up to $10,000 for most borrowers, and up to $20,000 for Pell Grant recipients.

The Fed's 75 bps rate hike (seen above) takes the key policy rate to its highest level since the 2008 financial crisis

The Fed’s 75 bps rate hike (seen above) takes the key policy rate to its highest level since the 2008 financial crisis

The Fed's policy moves over the last eight presidential administrations are seen above

The Fed’s policy moves over the last eight presidential administrations are seen above

WILL SAVINGS ACCOUNTS OFFER HIGHER RETURNS?

Savings, certificates of deposit and money market accounts don’t typically track the Fed’s changes.

Instead, banks tend to capitalize on a higher-rate environment to try to thicken their profits. They do so by imposing higher rates on borrowers, without necessarily offering any juicer rates to savers.

But savings accounts could see a moderate rise in interest payouts at the benchmark rate rises.

The national average interest rate for savings accounts is 0.13 percent, according to Bankrate’s latest weekly survey on September 14.

The rising returns on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, which means households may want to boost savings wherever possible. 

You can also now earn more on bonds and other fixed-income investments.

Though savings, CDs, and money market accounts don´t typically track the Fed´s changes, online banks and others that offer high-yield savings accounts can be exceptions. 

These institutions typically compete aggressively for depositors. The catch is they sometimes require significantly high deposits.

HOW DO RISING INTEREST RATES IMPACT INFLATION?

If one definition of inflation is ‘too much money chasing too few goods,’ then by making it more expensive to borrow money, the Fed hopes to reduce the amount of money in circulation, eventually lowering prices.

Annual inflation remained painfully high at 8.3 percent in August. So-called core prices, which exclude food and energy, also rose faster than expected.

The Fed intends to use higher borrowing costs to slow growth by cooling a still-robust job market, controlling wage growth and other inflation pressures. 

By raising its key short-term interest rate, the Fed is attempting to cool down the economy in order to tame rampant inflation, which remains stubbornly high at 8.3% in August

By raising its key short-term interest rate, the Fed is attempting to cool down the economy in order to tame rampant inflation, which remains stubbornly high at 8.3% in August

Fed Chair Jerome Powell warned last month that, ‘our responsibility to deliver price stability is unconditional’ – a remark widely interpreted to mean the Fed will fight inflation with rate increases even if it triggers deep job losses or a recession.

The goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.

Earlier this month, Powell acknowledged that aggressively raising interest rates would ‘bring some pain.’

WILL THE RATE HIKES TRIGGER LAYOFFS AND HIGHER UNEMPLOYMENT? 

Some economists argue that widespread layoffs will be necessary to slow rising prices. One reason is that a tight labor market is fueling wage growth and higher inflation. 

In August, the economy gained 315,000 jobs. There are roughly two job openings advertised for every unemployed worker.

‘Job openings continue to exceed job hires, indicating employers are still struggling to fill vacancies,’ noted Odeta Kushi, an economist with First American.

As a result, some argue higher unemployment might cool wage pressures and tame inflation. 

Research published earlier this month by the Brookings Institution stated that unemployment might have to go as high as 7.5 percent to reduce inflation to the Fed’s 2 percent target.

Economists expect Fed officials to forecast that their key rate could go as high as 4 percent before the new year. 

They’re also likely to signal additional hikes in 2023, perhaps to as high as roughly 4.5 percent.

Short-term rates at these levels will make a recession likelier by increasing the cost of mortgages, car loans, and business loans. 

While the Fed hopes that higher borrowing costs will slow growth by cooling the hot job market and capping wage growth, the risk is that the Fed could weaken the economy, causing a recession that would produce significant job losses. 

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