Interest rates appear to be on the rise this year. Here’s what you need to know.

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An increase in the federal funds interest rate will make it more expensive for banks, credit unions and other lenders to borrow money, and lenders are likely to pass on most if not all of these additional expenses to consumers.

Here’s what you need to know:

Q. Will a change in interest rates result in a higher rate on my current mortgage?

A. It depends on whether you have a fixed rate mortgage or an adjustable rate (ARM) mortgage. If your mortgage is fixed, your interest rate will not change. It’s locked in under the terms of your mortgage for as long as you have it.

If you have an ARM, you may face a higher interest rate. An ARM allows a borrower to lock in an interest rate that is usually lower than fixed rates, but only for a set period of time. At the end of this period, the interest rate resets, usually to an index-based rate such as the prime interest rate, which rises or falls along with the federal funds rate. If your ARM resets at a time when interest rates are higher, as seems likely this year, you could pay more interest. The most popular ARMs reset after five years and then every year thereafter.

Q. What would a higher interest rate mean for someone shopping for a house or condo?

A. If interest rates go up, buying a house or condo will cost more. The sale price of the property and the amount you borrow may not change, but the monthly interest charges will increase.

Q. How much more would it cost?

A. If the Fed raises interest rates by three-quarters of a percentage point, it could cost borrowers more than $130 a month in additional interest, based on a $300,000 30-year loan. This would add over $45,000 in interest payments over 30 years.

Q. How much of my monthly budget should go to paying off my mortgage?

A. Financial advisors generally recommend that you spend no more than 28% of your gross monthly income on mortgage payments, including principal, interest, taxes and insurance. If your interest charges increase by $130 per month, you may need to check to see if you are still within the 28% limit. Here is advice from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/owning-a-home/explore-rates/

Q. What about refinancing my mortgage?

A. The goal of paying off your existing mortgage with a new mortgage is usually a lower interest rate, and therefore a lower monthly payment. Refinancing is very popular in times of falling interest rates and slows down when interest rates rise. Check with lenders to see if it makes sense to refinance now before interest rates rise.

Q. What about credit cards?

A. An increase in credit card interest rates seems very likely. Most credit card issuers use a variable annual percentage rate (APR) on any balance you may have. Check your monthly statement for an explanation. My credit card company says they charge me “premium + margin”. “Prime” is the lowest rate banks charge their highest quality customers, including other banks. It fluctuates with the federal funds rate. The “margin” is the number of percentage points the credit card company charges over the prime rate, usually based on things like your creditworthiness.

Q. So I will pay more interest on credit card debt?

A. Probably. But credit card companies must warn you before raising their interest rates, usually on the monthly statement. My credit card company limits interest rate changes to once every three months. Now is the time to pay off some of your debt before the APR flies away, if possible. And, remember, you can always call and ask for a lower rate. You can get it if your credit card company thinks you can take on your debt from a competitor.

CreditCards.com predicts that the average credit card interest rate approach 17 percent by the end of the year, compared to 16.13% currently.

Also take advantage of zero percent interest offers. If you have more than one credit card and one of them offers a zero interest rate, you can transfer your balance from a higher interest rate card to a zero rate card, often for a year or more. This way you can pay off your balance without paying interest. There are, however, fees for taking advantage of the zero percent offers.

Q. What about car loans?

A. Auto loans will likely increase this year, but perhaps not as much as other types of loans. One of the reasons is fierce competition among car dealerships due to ongoing supply chain issues. A much bigger problem for consumers may be the high cost of new and used cars and trucks due to inflation.

Q. What about student loans?

A. Rising interest rates will not affect existing fixed rate private student loans, but will likely increase rates on variable rate loans and new loans. If you’re considering refinancing your private student loan, now might be a good time to investigate, before higher rates take effect.

Federal student loans are fixed and not subject to rate increases. However, the interest rate on new federal student loans is expected to increase when the annual reset takes place on July 1.

Q. Are there benefits to higher interest rates for consumers?

A. Yes, savings rates are expected to increase slightly on bank certificates of deposits (CDs), money market accounts and regular savings accounts.


I have a problem? Send your consumer concern to [email protected] Follow him on Twitter @spmurphyboston.

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