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For the first time since 2006, the Federal Reserve has announced that it will raise interest rates by 25 basis points. This means that it is increasing the target for short term interest rates to a range of 0.25% to 0.50% from a range of 0% to 0.25%.
Within minutes of the Fed’s decision Wednesday, Wells Fargo, JPMorgan Chase and US Bancorp became the first banks to announce that they would increase their prime rate, a rate used for consumer loans like mortgages. Effective December 17, the prime rate at Wells, JPM and US Bancorp will move from 3.25% to 3.5%. Later in the afternoon, Citibank announced a similar move; many other banks are likely to follow suit.
Yet despite this and despite all the hubbub surrounding the Fed’s decision – journalists and Fed watchers have literally been talking about a rate hike for years – the immediate impact to consumers’ wallets will be virtually indiscernible. Fed chair Janet Yellen even said as much in her Wednesday afternoon press conference.
It is a very small move. It will be reflected in some changes in borrowing rates. Longer term interest rates, loans that are linked to longer term interest rates, are unlikely to move very much,” Yellen said. “For example, some corporate loans are linked to the prime rate, which is likely to move up with the Fed Funds rate, and those interest rates will adjust. I think credit card rates that are linked to short-term rates might move up slightly. But remember, we have very low rates, and we have made a very small move.”
Put another way: ”The impact of a single quarter-point interest rate hike is virtually inconsequential. You won’t notice it,” said Greg McBride, chief financial analyst at Bankrate.com. “But: this could be the start of a series of interest rate hikes, and the cumulative effect of those could be significant over the course of the next couple of years.”
By all indications, Wednesday’s rate hike is indeed the start of an upward trend — but a gradual one at that. The Federal Open Market Committee said Wednesday that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
Here’s a look what exactly all of this means for mortgages:
Mortgages. The rules for mortgages are roughly the same as those for student loans: if you have a fixed rate mortgage, you needn’t worry. If you have yet to take out a mortgage but plan to do so in the future, you will receive a slightly higher rate than you would have if you had locked in your rate during 2015 (or 2014, or 2013… you get the point). And if you have an adjustable-rate mortgage, you will see your rate go up.
Bankrate’s McBride noted that adjustable-rate mortgages only adjust once per year — so it’s not as if you will see your payments fluctuating on a monthly basis. However, this means that “the Fed could raise rates two or three times becore your rate adjusts. Then you’re looking at a significant rate increase,” McBride said. In his view, folks who have an adjustable-rate mortgage would be best served by locking in a low fixed rate while they still can — i.e, before the Fed makes further changes to interest rates.
“That’s the urgency now,” he said. “That adjustable rate mortgage at 3%, which could easily be at 5% in a couple of years, you could trade that away for a fixed-rate mortgage at 4%.”