• Investing & Markets

Fed Raises Interest Rate 0.25% – What Does This Mean For You?

December 18, 2015 | Marianne Ahlmann

If you’ve turned on the radio or read the paper even once this week, you’ve probably seen the Federal Reserve’s interest rate increase all over the news. And if you’re like most folks, you’re wondering what this means for you and your finances.

So let’s start with a recap. On Wednesday, The Fed announced an interest rate raise of 0.25%. While the raise didn’t come as a surprise after months of speculation, it was impactful because it marked the first rate increase the US has seen in the last 10 years. And in 2016, rates are expected to gradually increase another 1%, with plans to change course should the economy falter. From what mortgage rates you’ll be able to get to how your investments could be affected, read on to see what the Fed’s decision will mean for you:

Mortgages – Rates Likely To Rise In 2016

It’s no secret that the housing market has reaped the benefits of low rates in recent years. And since the latest real estate crash, job and economic growth have also aided the recovery of the housing market.

If you’re thinking about purchasing a home, the important thing to know is that 30-year mortgage rates are mainly influenced by 10-year Treasury and mortgage-backed securities, so don’t expect a direct correlation with the rate increase and your mortgage. In the 2004-2005 tightening Fed Rate cycle, mortgage rates actually fell, and we don’t expect any impactful changes in the short term now.

With another 1% rate increase in 2016, however, 30-year fixed term mortgage rates are likely to rise slightly. Fannie Mae’s chief economist predicts that a standard 30-year mortgage on $225,000 home, for example, will easily see a bump from 3.9% to 4.1% (which would reflect just a $26 increase in your mortgage payment each month). Adjustable-rate mortgages, on the other hand, may rise as much as 0.5%.

Car Loans – Rate Increases Expected

The auto industry has been booming, with sales predicted to reach 17 million by the end of 2015. For reference, it’s the first time numbers have been this high since the Great Depression. Due the shorter-term duration of a car loan, these loans are much more likely to be directly impacted by Fed policy changes.

That means that if you’re in the market for a new ride, you can expect your loan rate to rise, likely with a 6-month lag after the Fed’s news. Experts predict that for a $25,000 car, rate increases will amount to about $16 per month for a standard loan.

Savings And Money Market Accounts –Small Rate Changes To Come

Interest on savings and money market accounts lags behind the Fed Funds Target rate by a few months, and they don’t rise quite as sharply. In the short term, you should only expect small changes.

Exports & Imports – Time To Buy

As Personal Capital’s Executive Vice President of Portfolio Management, Craig Birk, comments, the dollar has gained value over the last year due to the expectation that the Fed would raise rates. We can’t predict exactly what’s to come, but the pressure is on for exports.

Planning a vacation any time soon? With a strong US dollar, now might be the time to snag airline tickets and book hotels for that European getaway you’ve been dreaming of.

Impact On Your Investments

While it’s impossible to know the future, we can look at Fed interest rate raises historically for a pretty good idea of what’s to come. During the 12 months following past rate increases, markets remained strong. But the second year after a raise is often shakier. Overall, the message to investors is to remember to focus on a long-term financial plan. And as long as the Fed continues to set expectations when a rate raise is on the horizon, markets should be able to digest changes fairly easily.

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