What the Federal Reserve rate increase means

The Federal Reserve increased the Fed funds rate by 25 points to slow down the highest inflation seen in 30 years. As a result, here’s what this means for interest rates, credit cards, and home equity lines of credit.

 

In short, everything is going up. Mortgage rates are also higher but not because of the Fed increase. Mortgage interest rates do not like inflation is the arch enemy of both stocks and bonds. On the news of inflation mortgage rates rise. The Federal Reserve has increased interest rates to help slow down present inflation levels in the United States. As a result, mortgage rates generally improve to some degree which they recently did after the fed decided to hike rates. Over time, the Fed is committed to increasing rates in a series meaning small adjustments over time. This long-term should be good news for mortgage rates. However, in the short-term present mortgage rates are volatile based on what’s transpiring in the economy as well as the war with Russia and Ukraine. Home equity lines of credit are also no stranger to inflation and as a result, now cost more.

 

This means if you have a home equity line of credit, next month you can see an increase in your interest rate which will result in a higher monthly payment. Tapping your home equity is no longer deductible. Add that in with an adjustable-rate mortgage and you have a recipe for a tough situation potentially as it relates to the cost of funds associated with home equity lines of credit. Credit card rates, same thing. Just like home equity lines of credit these are also now rising. So, your 20% credit card is now higher because the fed decides to increase rates. Again, higher interest rates result in higher payments further straining the family household budget. Lastly, oil prices are high. What we have now is a culmination of everything costing more because of this economic cycle that we are presently in. If you have a house, credit card debt, and a home equity line of credit you’re in for more pricey times ahead. Combine all your debt, particularly the home equity line of credit, and start over. It’s not a horrible idea even if it means giving up your 2.875% rate on a 30-year fixed mortgage to go into a 4% mortgage. Such a scenario could make economic beneficial sense for you and your family as it relates to a budget where you can do something beneficial with the monthly savings. Maybe you set up your banking where you automatically pay yourself first each month forcing yourself to save before paying creditors.

 

Another idea if you know you’re a spender, is to consolidate your 30-year mortgage, your home equity line of credit, and all of your consumer debt. Maybe car loans if tuned to a 15-year fixed rate mortgage more than likely you’re probably paying the same amount combined on all of that debt anyway. Why not consider going into a 15-year mortgage and not start the clock over and make a radical dent in your financial future for the positive? These are all things to consider. The reality of it is that interest rates and everything right now is pricey. They’re continuing to rise which presents an opportunity to give yourself a raise. This is effectively what you’re doing by refinancing and debt consolidating all of the obligations into one low fixed rate affordable monthly payment which more than likely is probably going to be deductible. If you’re in this situation where you have excess debt, even if you have a good interest rate on your first mortgage it might not be a bad idea to evaluate what cash-out refinancing could do as it relates to your ability to save money and get ahead financially by being a bit more prudent with your spending and financial habits.

 

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