2022 has been a whirlwind year for interest rates. The year started off with the federal funds rate (i.e., the interest rate range set by the U.S. Federal Reserve) between 0.25% to 0.50%. However, after multiple unprecedented rate hikes – escalating at one of the fastest paces in 40 years – the new federal funds rate sits at 4.25% to 4.50%.
According to comments from Fed chairman, Jerome Powell, consumers should still expect more “pain” as he describes it throughout 2023 foreshadowing more rate hikes to come. From the minutes of their last meeting of the year on December 14, 2022, Fed officials forecast at least three more quarter-point increases, bringing the rate to a maximum between 5.00% to 5.25%. This is much higher than the 4.50% to 4.75% peak that was originally predicted back in September.
Of course, this is all necessary for the fight against inflation. The long-standing theory by economists is that to cool off inflation you need to slow down business. The way to do that is to make borrowing money more expensive by raising interest rates. While inflation does appear to be slowly decreasing, the byproduct of interest rate hikes is that it affects nearly every financial product that you and I use.
Most will be influenced negatively; however, there are a few times when rising interest rates can work to your advantage. In this post, we’ll explore how rising interest rates have impacted your financial situation, both good and bad.
Mortgages
Perhaps one of the most notable changes this year has been with mortgage interest rates. At the beginning of the year, borrowers could get a 30-year fixed-rate mortgage with an APR of 3.25%. As of this writing, that rate is now closer to 6.75%.
While the Federal Reserve does not dictate mortgage rates, it does indirectly influence them through something called the prime rate. The prime rate is a variable figure used within the finance industry that serves as the basis for determining the rates of all other financial products:
- Mortgages
- Loans
- Savings accounts
- Etc.
When the Fed decides the cost of borrowing money needs to go up, the banks will do the same by increasing the prime rate.
For mortgages specifically, borrowers have felt a direct impact over the past year. A typical $200,000 mortgage would have cost borrowers $870 per month in principal and interest at the beginning of the year. However, due to rising interest rates, that same monthly payment would now be $1,297.
This has not only affected new mortgages but also any loan where your primary residence is used as collateral. Mortgage refinances have drastically declined since no one is interested in taking out a loan that is more expensive than the original mortgage.
Home equity loans and HELOCs (i.e., a home equity line of credit) are also much more expensive. Because the rates for these loans are closely tied to the interest rates of mortgages, the cost of withdrawing your home’s equity is also much greater.
If you’d like to avoid paying more than you have to for one of these loans, then the best thing you can do is to stay put. If you can help it, don’t make any plans to move, refinance, or borrow against your equity until we see how the markets look in 2023.
Credit Cards
If you’re in the habit of charging your expenses to your credit card and allowing the balance to revolve, then the cost of this convenience has gotten much more expensive. Most credit cards have what’s called a variable interest rate, meaning that it’s free to fluctuate at the card issuer’s discretion – most likely when the prime rate has adjusted in response to a change in the federal funds rate.
Unfortunately, since the Fed has raised its interest rate so much this year, this means that most credit card APRs have also increased. The best way to combat this is to not have to pay any interest at all. Whenever you receive your credit card bill, do everything in your power to pay it off in full. That way no balance will be carried over and you won’t owe the credit card company any interest at all.
Auto and Personal loans
Just like mortgages, the interest rates associated with loan products are tied to the prime rate. Therefore, going forward anybody who needs to borrow money to buy a vehicle or to pay for an unplanned expense will likely have to pay a whole lot more than they would have a year ago.
If you find yourself in a situation where you absolutely need an auto loan or personal loan, then take the time to shop around. Don’t just go with the first lender that you contact. Sometimes certain credit unions or online banks will have more favorable rates than traditional lenders. Do yourself a favor and find one that’s reputable and as willing to offer you the best terms.
Savings Accounts
One bright spot with rising interest rates has been the return of interest payments within savings accounts. Throughout the 1980s, 90s, and even the early 2000s, it was very common for bank accounts to pay some nominal interest rate on your deposits. For example, if you had $10,000 that you wanted to set aside for an emergency or an upcoming major purchase (like a down payment on a house) and your account paid an interest rate with a 5% APR, then you’d earn $500 for doing nothing but letting the money sit.
However, that all changed with the Great Recession in 2008. To avoid letting the recession slip into a depression, the Fed cut interest rates down to nearly zero. It ended up helping the overall economy, but most retail bank accounts more or less stopped paying interest to their customers.
This seems to be changing now in 2022. Although traditional brick-and-mortar banks are still stubbornly paying no interest, many reputable online banks have plumped up their high-yield savings accounts and offering interest rates at 3% or higher.
Note that just like brick-and-mortar banks, these online banks are FDIC insured for up to $250,000 per depositor. That means that if anything were to ever happen to the financial institution, you’d be covered up to this amount.
CDs
CDs or “certificates of deposit” used to be an easy way to earn lots of interest. Similar to savings accounts, CDs used to pay much higher rates about 20 years. However, they were also decimated when the Fed dropped its lending rate to nearly zero around the Great Recession.
This year there has been a resurgence in the popularity of CDs. Investors looking for an extra one percent (or so) and who don’t mind locking up their money for one to five years can easily get above 4% from a CD.
If you’d like to set some money aside to open a CD or contribute to a high-yield savings account, then try using a budgeting app like Buxfer to review your spending habits. Buxfer connects with all of your bank and credit card providers to download all of the transactions and compiles them into one real-time report. This will help you identify areas of your spending where improvements could be made and more money could be potentially saved.
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