Higher Interest Rates Could Hurt Homebuyers and Borrowers

Higher Interest Rates Could Hurt Homebuyers and Borrowers

Raising interest rates once is unlikely to have a major impact, but the cumulative effect could spell trouble.

 

The Federal Reserve just raised interest rates for the first time since 2018 in an effort to contain inflationary pressures that have reached a forty-year high. The Federal Reserve’s move appears to have many Americans on edge.

But Greg McBride, chief financial analyst at Bankrate.com, told CNBC that “one single quarter-point rate hike from near-zero levels will have a minimal impact on household finances.”

 

However, if the current inflationary environment continues, the Federal Reserve also penciled in rate increases at each of the six remaining meetings this year, which would point to a consensus funds rate of 1.9 percent by the end of the year. 

“The cumulative effect of rate hikes is what is really going to have an impact on the economy and household budgets,” McBride added.

Borrowing Costs

The rate hike will surely be bad news for potential homebuyers. The average thirty-year fixed-rate home mortgage is now above 4 percent and will likely trek steadily higher going forward.

According to CNBC, “a $300,000, 30-year, fixed-rate mortgage would cost you about $1,432 a month at a 4% rate. If you paid 4.5% instead, then the same loan would cost $131 a month more or another $1,572 each year, and $47,160 over the loan’s lifetime.”

Potential car buyers should note that “a quarter percentage point difference on a $40,000 loan is about $5 a month, or another $300 over the life of a five-year loan.”

It’s also smart to keep a close eye on credit card interest rates, which could start climbing higher within a billing cycle or two. “If you owe $5,000 on a credit card with an APR of 19% and put $250 a month towards the balance, it will take 25 months to pay it down and cost you $1,060 in interest charges,” the business news outlet noted. “If the APR edges up to 20%, you’ll pay an extra $73 in interest.”

Affecting Investments

Higher rates going forward could also have major impacts on stocks and cryptocurrencies. According to some experts, the prospect of elevated rates is already creating higher volatility in the market.

“The stock market is forward looking, so just the expectation of higher rates has had an impact,” Caleb Tucker, director of portfolio strategy at Merit Financial Advisors in the Atlanta area, told Bankrate.com.

Since the start of this year, the S&P 500 has fallen about 12 percent, while the tech-heavy Nasdaq Composite has dropped by 18 percent.

“Assets that have benefited most from ultra-low interest rates—think high-octane growth stocks with earnings well off into the future and non-cash-flow-generating assets like cryptocurrencies—have been most susceptible to a pullback given the prospect of higher interest rates,” McBride said.

Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.

Image: Reuters.