How Rising Interest Rates Could Affect You

The Federal Reserve raised interest rates by 0.25% earlier this month, and has signaled up to six more interest rate increases throughout the rest of 2022. Some economists and experts are anticipating the possibility of the next two, or other interest rates increases, being 0.50% instead of the traditional 0.25%, which could make interest rates end at up to 2.00% by the end of the year.

Increasing interest rates will likely be felt by most households. Higher interest rates can raise the cost of borrowing for consumers seeking to buy homes, cars, and other things. At the same time, rising interest rates will hopefully lower the inflation rate, which is currently the highest it's been in 40 years, and thus bring the rising cost of goods under control.

Below are some of the ways in which higher interest rates could affect you.

Mortgage interest rates started increasing in anticipation of the Fed's rate increase this month. With the Fed set to raise interest rates further this year, it should be expected that mortgage interest rates will continue to increase as well. This will increase the cost of purchasing a home, and in some cases may result in lower loan approval amounts. For any borrowers with adjustable interest rate mortgages, they should expect their mortgage payments to increase with the rising interest rates.

Beyond the direct affect of increasing interest rates on mortgages, an indirect effect could be a decrease in home prices due to a drop in demand. When money is not as easy to borrow, demand drops which lowers the pushing up of home prices. Prices may not drop, but they could, and if they don't we could at least see a drop in the rate at which home values rise.

The Fed's interest rate hikes could cause the interest rates for auto loans to go up as well. The shortage of cars due to various supply chain issues has already caused the cost of buying a new car to increase dramatically over the past couple years, but now higher interest rates will cause the cost of buying a car to go up even more when you add the extra interest on those loans. It's possible that higher interest rates would weaken demand for new cars, which may in turn cause a decrease in new car prices. If that happens, it might help to offset the increase in interest rates. That could happen as supply chain issues are resolved as well. We'll have to wait and see what happens.

Certain types of loans with adjustable interest rates will likely experience interest rate increases with each hike by the Fed. The types of loans include adjustable rate mortgages mentioned above, home equity lines of credit (HELOCs), and credit cards. The 0.25% increase may not make a dramatic difference right away, but another 1.25% to 1.75% in interest rate increases by the end of the year could. Anyone with an adjustable rate loan may want to consider refinancing or consolidating into a fixed-rate loan or begin paying down the principle balances.

One good thing that will come out of rising interest rates is an increase in the interest paid on savings accounts. Traditional savings accounts at large institution banks may not see much, if any, increase, but savers with high-yield savings accounts likely will. Currently, high-yield savings accounts may range from 0.30% to 0.60% annually, but we could see over 2% interest or higher within a year. Yields on CDs and other types of savings accounts should increase as well.

For those holding existing bonds issued before interest rate increases, they will likely see the value of the bonds themselves decrease. This is because bond purchasers will generally prefer to purchase bonds that have a higher coupon (interest rate). So selling a bond with a lower coupon than other available bonds, may result in a selling price below the face value of the bond. This will especially be true for long-term bonds.

For holders of inflation-adjusted bonds, if inflation decreases because of rising interest rates, they will see the interest rate they receive on their bonds decrease when the adjustment period comes.

The Fed rate increase is expected to be in May, which could be 0.25% or 0.50%. If you feel you need assistance with making adjustments to your finances, Escient Financial is here to help. Feel free to...