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The financial impact of prime rate increases


The Federal Reserve just recently announced another increase in the federal funds target rate which for consumers means an increase in the prime rate. Additionally, the Fed has indicated there could be three to four more increases this year. There are consequences for everyone when prime rate increases.
 
What are the most likely loan rates to increase?
Auto loans and personal loans tend to increase fairly quickly after a prime rate increase. In fact, auto loans are already at a nine year high. Fixed rate mortgages are not usually directly tied to a prime rate increase but over time prime rate increases will push these rates higher as well.
 
Who will be impacted immediately by this increase?
Anyone who carries a balance on a credit card or has variable rate loan such as a home equity line of credit. These rates will normally adjust very soon after the rate increase. Consumers who have an adjustable rate mortgage will see an increase but fortunately, that won’t occur until their next adjustment period.
 
Do you have any advice for people who have an adjustable rate mortgage?
Refinance to a fixed rate mortgage is one option. This all depends on the timing of their next rate adjustment, the amount the rate can go up and when they expect to move or pay off the mortgage. Even if your ARM rate increases, it might still be lower than the fixed rates available. Talk to a mortgage professional to look at all of the different scenarios for your situation.
 
What is the biggest impact for consumers when prime rate increases?
The cost of debt increases impacting the monthly payment amount and the overall cost of borrowing. This will sometimes mean people will need to buy a less expensive car or a less expensive house to be able to afford the higher monthly payments.  With the Fed expecting more increases, now might be the time to make a move for a new car or home.
 
Does a prime rate increase impact deposit rates?
There is no direct correlation but generally, as prime rate increases, there is a lagging impact on deposit rates. At this time, there seems to be some upward movement in rates for certificates and money markets and that could continue if the Fed continues to increase the prime rate.
 


Posted: 6/22/2018 with 0 comments

Categories: Credit, Money Matters, Planning



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