The Wide Impact of Fed’s Prime Rate Hike

Individuals with credit cards and home equity lines of credit tied to the prime interest rate used by the Federal Reserve to set many lending rates will begin paying higher monthly payments as soon as next month, according to Florida-based research group Bankrate.com and as reported in the Birmingham News. The Fed’s brain trust raised the important federal funds rate a quarter of a point to 4 percent, making it the 12th increase of that rate since June 30, 2004. Most banks immediately followed suit by boosting their prime rate to 7 percent.

Federal Reserve officials hinted that rates may rise again when the board meets in December and January, amid concern from some analysts that the impact of the rate hikes does not resonate evenly throughout the economy. “When the Fed increases interest rates, ” says analyst Greg McBride of Bankrate.com, “Different interest rate-related products will behave in different ways.”

One of the most affected areas of the change will be the mortgage market.

• Bankrate.com began surveying a $30,000 line of credit in July 2004, and since that time, the average rate of a home equity line of credit has increased from 4.71 annually to last week’s 6.97 percent. Homeowners could see equity credit line rates go up as quickly as their next one to three payments, depending on the lender.
• As for standard fixed-rate home loans, they are more closely tied to long-term yields of government bonds and not directly impacted by Fed interest rate moves. That’s the good news. However, fixed mortgage rates have already been on the rise over the past month and a half, climbing to 6.37 percent as of last Wednesday. Inflation, stoked by higher gasoline and energy costs, is also to blame for the drop in demand.
• A homeowner’s adjustable-rate mortgage (ARM) will be a difference story. Since ARMs are primarily tied to short-term indexes, they susceptible to rising after the Fed hikes up its rates. A 1-year ARM averaged 5.35 percent last week compared to just 3.42 percent in March of 2004. The adjustable-rate loan remains a good option for consumers who move a lot, however, and should not necessarily be avoided as a result of the recent rate increases.

The Fed’s actions will invariably impact the Florida home loan market… and beyond. Consumers with outstanding credit card debt or other outstanding loans, such as auto loans, can also expect interest rates to rise and higher payments to follow in the coming months, experts say. Credit card holders with less-than-perfect credit can expect steeper rates, while the average four-year, new-car loan rate has increased from 7.15 percent to 8.06 percent in the past year and a half, according to the report.