When a snowstorm bears down on Northern Virginia, where I live now, panic is sometimes the order of the day. A few inches shuts down schools, empties grocery store shelves and litters road shoulders with fender benders.
But for the 12 years I lived in the snow belt of Upstate New York, such a dusting wasn’t even a topic of conversation.
I was thinking of this difference now that the US is bracing for an expected three interest rate hikes this year. These will be hikes from the Federal Reserve, the nation’s central bank.
The rate that will be changing is the “federal funds rate.” That rate basically sets the “prime rate,” which is what banks charge their best customers, and the prime rate is what you’ll often hear is used to set those variable rates.
The best way to face these coming hikes is as an “Upstater” faces a snow storm.
Rule 1: Don’t panic. This is especially true considering rates are historically low. Three 0.25 percent increases aren’t the financial equivalent of a blizzard.
Rule 2: Be prepared.
Rule 3: Enjoy. (More on this later.)
Here’s how the hikes will start to shake out: The first rate hike will likely occur in March, when the Federal Reserve – nicknamed “the Fed” – will increase its basic rate by 0.25 percent, to 1.75 percent.
It’s in the Cards
The rate increase will probably be passed along to your credit card rate almost immediately — but you’ll hardly feel it if you have a low balance.
Credit card debt: For every $1,000 in credit card debt, a rate hike will add $2.50 in a year.
Assuming three hikes, that means an extra $7.50 annually will be added to your same $1,000 balance. If this were snow, you wouldn’t even break out the shovel. You’d use a broom to sweep off your front steps and sidewalk.
But for people with high balances, the rate hike becomes more of an issue. The average card debt for households with a credit card balance is about $15,600. This means an extra $117 a year in interest charges.
If your balance is that high, you might consider these rate hikes a wakeup call. If your credit card APR is the average 15 percent, you’re already paying $2,340 a year in interest payments. So consider shopping for a lower rate — even 1 percentage point lower rate will save you more than the Fed rate hikes this year.
Home equity lines of credit (HELOCs) — loans based on the equity in your home — are also variable and will go up along with Fed rate hikes. These rates are currently less than 5.7 percent on average, but will probably top 6 percent with the Fed hikes before the end of the year.
The best piece of advice I got on driving in the snow was: don’t. With enough planning, you could avoid unnecessary trips. And you can sometimes avoid the financial pain of high rates with planning as well. For example, if you have a high credit card balance, take out a HELOC, pay off your credit cards and save hundreds of dollars in interest payments. Just make sure you don’t turn around and run up a high credit card balance again—which can be a temptation for many.
Auto Rate Variables
If you already have an auto loan, that fixed rate is locked in, so you don’t have to worry about the Fed hikes. However, if you’re shopping for a car, the Fed hikes will increase auto loan rates on average. But car loan rates vary quite a bit depending on your credit worthiness and what kind of rate you can get from your bank or credit union. The increase in car loan rates is small factor compared to those variables, not to mention your loan’s term length — and of course, how much you pay for the car.
Unfortunately, most people now buy a vehicle based on the monthly payment, and often ignore the rate paid and the total interest rate charges. Make a point of finding out those charges over the life of a loan. That will often motivate you to negotiate a better deal.
The Fed hikes won’t directly affect fixed-rate mortgages. Those are tied to the 10-year Treasury bond rate, and those rates are set mainly by the financial markets by supply and demand.
However, the 10-Treasury has already started to rise this year, and is expected by many analysts to rise further. 30-year mortgage rates have averaged around 5.6 percent the last 20 years.
Don’t let the prospect of rising mortgage rates trigger you into buying a house quickly. There are so many factors to consider in such a major purchase. The last big snowstorm we had here in Virginia drove a few neighbors to impulse-buy snow blowers and, well, some bought ones so underpowered they’d have been better off using a leaf blower.
To give you a rough idea the effect of rates, a $200,000 mortgage loan at 4 percent results in a $955 monthly payment (with principal and interest). A 4.5 percent loan for the same amount is $1,015, or an extra $58 monthly.
If you already have a variable rate mortgage, you can expect your rate will rise along with Fed hikes.
The Upside of Rate Hikes
Remember Rule 3? Enjoy.
When the snow came down Upstate I’d tie my cross-country skis to my roof rack, load my beast-of-a- dog in back, and head to the trails.
Savings rates are also on the move, and rising rates means you’ll get more money on bank savings accounts, money market accounts and certificates of deposit. When a year ago savers were grateful for a tenth of a percentage point increase or less, you can now find rates for some products jumping by 0.3 percent, 0.4 percent or more. Certificate of deposit rates particularly have started to rise and will probably continue to rise in 2018. Other savings products are not rising as much and the increases are mainly coming now from credit unions and online banks, with commercial banks lagging.
I recommend considering this savings strategy: Don’t commit yourself to a single certificate of deposit for a long term, unless it specifically meets a specific goal. Buy several CDs and stagger the terms – also known as certificate laddering – so you’ll be able to reinvest regularly as rates rise.