How Will Today’s Interest Rate Hike Impact Your Finances?

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The Federal Reserve System changed its benchmark interest rate today, upping it to a range between 0.5 and 0.75 percent.

This marks the first change in the federal funds rate this year, and only the second change in eight years. The hike means most Americans can expect their finances to be impacted in the new year. Whether the impact is positive or negative for you depends on what types of debts, savings and investments you have.

The Federal Reserve System, commonly known as “the Fed,” is responsible for setting monetary policy for the country.

From December 2008 until December 2015, the Fed kept its target interest rate at its lowest-ever level, within a range between 0 and 0.25 percent. One year ago, it was increased a bit, to a range between 0.25 to 0.5 percent.

Now that it has been increased again, here’s what you should expect:

Mortgages

A rise in the Fed’s benchmark interest rate affects certain types of real-world interest rates more than others.

If you are shopping for a fixed-rate mortgage, don’t expect drastic changes. Fixed-rate mortgages are not directly tied to the federal funds rate. But things might be different if you are shopping for an adjustable-rate mortgage — or if you already have one.

Greg McBride, chief financial analyst at Bankrate, tells CNBC that homeowners with an adjustable-rate mortgage “are a sitting duck for a big increase.” He goes on to explain that they might want to consider refinancing their mortgages:

“There is no sense in bearing the risk of an adjustable rate when you can lock in a fixed-rate and essentially the same level. The average 30-year fixed rate mortgage is about 4.15 percent — not all that far off from the record low of 3.5 percent.”

Credit cards and HELOCs

Expect borrowing costs on credit cards and home equity lines of credit, or HELOCs, to rise. Most credit cards come with a variable rate, and that rate adjusts over time.

As MarketWatch reports:

Credit card interest rates are … tied to the prime rate, an index a few percentage points above the federal funds rate. It is a benchmark that banks use to set home equity lines of credit and credit card rates; as federal funds rates rise, the prime rate does, too.

Interest-bearing savings accounts and CDs

Rising interest rates benefit money held in interest-bearing bank accounts, money-market accounts and certificates of deposit.

Because the Fed is expected to continue to gradually increase its rate over time, however, you should not necessarily anticipate a quick upward rebound in the interest rates you are paid on such accounts.

Have you made any changes to your finances or budget in anticipation of a Fed rate hike? Let us know below or on Facebook.

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