July 9, 2018
With the central bank of the United States (aka, the Fed) announcing another rate hike in June, borrowing costs will head even higher for consumers. But the good news for many of our broker’s clients is that bank customers will start to see noticeably higher savings rates.
Americans with credit cards, adjustable-rate mortgages and home equity lines of credit will see their monthly payments rise now that the Federal Reserve has lifted its key short-term interest rate by a quarter percentage point. All are revolving loans with variable rates that are directly affected by the Fed’s move. Car buyers may feel it, too, though they’re still benefiting from a competitive auto loan market that’s keeping borrowing costs low. Any effect on 30-year mortgages and other long-term loans would likely be muted.
Orion’s brokers have been through this before and know that HELOCs and ARM loans have become more expensive since their rates are generally tied to the prime rate, which in turn is affected by the Fed's benchmark rate. Average credit-card rates are already 17 percent, according to Bankrate.com.
But Orion’s pricing for 30-year mortgages has improved since the Fed announcement. Rates for home equity lines of credit are much lower at 5.92 percent. A quarter-point increase on a $30,000 credit line raises the minimum monthly payment by just $6 a month. By contrast, rates on adjustable-rate mortgages are modified annually. The impact may be delayed, but then it could bite. Four quarter-point hikes in 2018 likely would boost the monthly payment on a $200,000 mortgage by $84 to $112. The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly. Those rates correlate more closely with inflation expectations and the long-term economic outlook.
On a positive note, since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on the deposits customers make. Don’t expect a fast or equivalent rise in your savings accounts or CD rates, many of which pay interest of 1% or less. Those rates have barely budged the past year despite the Fed’s hikes. Low rates on loans have meant narrow profit margins for banks for years. But there are a handful of online and community banks, credit unions and money market mutual funds that are hungrier for deposits are paying as much as 2.5 percent on a one-year CD.
And while your clients look at savings options, be sure to check out some great programs we offer at Orion!