It’s starting to look like a sure bet: Interest rates are about to start rising again after hovering near historic lows for most of the last seven years.
A strong jobs report on Friday that showed 211,000 new jobs added in November cemented the belief among economists that the Federal Reserve will start raising short-term interest rates when it meets next week.
If the Fed does raise rates, it will signal a major change in a monetary policy that has driven down borrowing costs for homeowners, car buyers and people who use credit cards.
“If people already are in debt, their costs are going to go up,” said Amy Jo Lauber, a certified financial planner who runs Lauber Financial Services in West Seneca.
At the same time, it will bring a little relief to savers, who have been earning just a trickle of interest on money in savings accounts or certificates of deposit.
“It’s not going to be a monumental move for anyone’s financial situation,” said Steven M. Elwell, a certified financial planner at Schroeder, Braxton & Vogt, an Amherst money management firm. “But it is a monumental move in that it is the first rate increase since 2006.”
Most analysts aren’t expecting a big increase from the Fed, probably just a quarter of a percentage point in a short-term interest rate that now is only a little bit above zero. So a modest increase by the Fed won’t cause a sharp increase in borrowing costs.
“Even with an increase, we’d still be at historically low rates,” said Anthony J. Ogorek, who runs Ogorek Wealth Management in Amherst.
But it will signal that the era of historically low interest rates is ending, and that rates are likely to creep even higher next year. Federal Reserve Chair Janet Yellen has said she expects the Fed to take a slow-and-steady approach once rates start rising, possibly pushing rates up by another half percentage point to a full percentage point in a series of increases throughout next year.
“The significance is going to come with what the Fed’s target rate will be and how fast they plan to achieve that,” Ogorek said.
Regardless, the coming rise in interest rates will have far-reaching effects on consumers. Here’s what local financial experts say you should do to prepare.
The last few years haven’t been easy on savers. Conventional savings accounts barely pay any interest, while yields on certificates of deposit with terms as long as five years are below 1 percent.
A Fed rate hike likely will push deposit rates higher, but not by much.
“They’ll begin to creep up,” Ogorek said.
Online banks may bump up their interest rates faster than conventional banks, so savers with expiring CDs may want to shop around, Elwell said.
If you’ve got a mortgage with a rate above 5 percent and you’ve been thinking about refinancing to lower your borrowing costs, the time to act is now.
The same holds true for home buyers preparing to take out a mortgage: Don’t wait. Lock in today’s mortgage rates at today’s rates, which are around 4 percent for a 30-year loan.
While mortgage rates closely track the yield on 10-year Treasuries, rather than the short-term interest rates that the Fed has the most sway over, a turning tide toward higher rates is likely to push long-term borrowing costs up, too.
“You’re going to want to talk to your mortgage broker or banker pretty soon,” Elwell said.
Home equity rates
Home equity lines of credit typically have variable interest rates that are pegged to changes in the prime rate. So when the Fed raises rates, the prime rate usually goes up, which increases the borrowing costs on home equity loans.
The first increase in rates isn’t likely to cause a major change in a borrower’s monthly payment, but if rates continue to rise throughout 2016, it could make those monthly home equity payments more painful.
The likelihood that borrowing costs will start to rise is a good reason for consumers to review their budget and debt load, Lauber said. Consumers should ask whether they can afford the higher payments that will come with rising rates, and also assess whether this is a good time to try to pay down debt as much as possible.
“You’ll want to ask, ‘do you really need to borrow this money,’ ” she said.
A less common version of home equity borrowing, home equity loans, often have fixed rates, so those won’t fluctuate with changes in short-term borrowing costs.
Using credit cards – and not paying off the balance in full each month – is going to get more expensive. Credit card interest rates, which now average just under 16 percent on cards with variable rates, are likely to increase as the Fed raises rates.
Credit card issuers still are dangling low- or zero-interest balance transfer offers to consumers with good credit, so consumers who are carrying a balance on their credit cards can shift their borrowings to lower-rate cards, Elwell said.
Moving to a lower-rate card but continuing to make the same – higher – payment that was required under the old card could help consumers pay down their credit card debt faster.
The cost of car loans isn’t tied directly to a low federal funds rate, but a rising rate environment could push up the cost of car loans. Consumers could compensate for the higher interest costs by purchasing a slightly less expensive model, Ogorek said. A less financially sound way of managing rising car loan rates would be to extend the term of the car loan to make the monthly payment more manageable
“If you were going to buy something soon, maybe you want to get out there this weekend, rather than waiting two or three weeks,” he said.
Congress sets the rates on federally backed student loans. But many private student loans have variable interest rates that likely will rise. That will only add to the burden that student loan payments have on recent graduates, Elwell said.