What an interest rate increase means for real people

Many Americans don’t pay much attention to what Federal Reserve Chair Janet Yellen and “the Fed” do, but that could change very soon.

In June, the Fed could do something it hasn’t done since Barack Obama was a U.S. senator: raise interest rates.

Don’t hit the snooze button. An interest rate hike will impact everyone who has a home mortgage, car loan, savings account or money in the stock market.

In short, life is about to get better for savers and a little harder for borrowers. Investors could also face tougher times.

“The losers will be borrowers and the winners will be savers,” says Ted Peters, CEO of Bluestone Financial Institutions Fund and a former member of the Federal Reserve bank of Philadelphia.

Here’s the full run down:

1. Mortgage rates will rise: As the Fed signals its intention to raise rates, borrowers are rushing to get deals done now. There’s been a big rush of mortgage applications in 2015, driven by people refinancing to lock in lower interest rates.

“People thinking of buying a house should act quickly to lock in today’s low rates,” says Dean Croushore, an economics professor at the University of Richmond and former Philadelphia Fed economist.

An average, 30-year mortgage fetches a 3.8% interest rate now, according to Freddie Mac. That’s down from a year ago when rates were closer to 4.3%. The Fed cut rates to historic lows in 2008 in part to reboot the housing market, which collapsed when the housing bubble popped.

When the Fed likely raises rates this year, it will push mortgage rates and auto loans up, experts say. That said, it’s uncertain if that will cause home or car buying to slow down.

2. Savers succeed: Ever since the financial crisis, folks who put their money in the bank have gained next to nothing. With interest rates so low, people who played it safe have been getting the short end of the stick.

That will change for the better for people with savings accounts. Once the Fed raises interest rates, savers will gain more interest on the money they deposit at their bank.

The average interest rate on a savings account is a mere 0.44% right now, according to Bankrate.

Savers can smile all the way to the bank knowing the job market is looking good too.

3. Jobs, jobs, jobs: A big reason the Fed is planning to raise interest rates is because the U.S. economy is improving, especially the job market. Unemployment is down to its lowest level since 2008, and the U.S. has added millions of jobs in the past year.

“The labor market is improving,” Yellen said Wednesday. “Some of the headwinds that have been holding the economy back are beginning to recede.”

A rate hike would be Yellen’s two thumbs up that the economy is healthy.

The only concern is that a rate hike could hurt future wage growth. Many Americans haven’t sensed the success of the economy’s recovery because wage growth remains flat. The Fed wants to see about 3.5% wage growth, but it was only 2% in February.

However, Yellen made clear that wage growth isn’t a requirement to raise interest rates. Wages are usually the last measure of the economy’s health to move in the right direction.

“We may not see wage growth pick up,” Yellen said. “I wouldn’t say that is a precondition to raising rates.”

4. Rocky ride for stocks: The stock market rallied big on Wednesday after the Fed released its official statement.

Don’t take that one day as a preview for the rest of the year though. Investors were largely reacting to language in the Fed statement suggesting that the central bank won’t raise rates in April and will likely raise rates only a bit in June or later.

Any rate hike will almost certainly increase volatility. Stocks are already considered expensive and many on Wall Street fear markets are overdue for a correction (when they drop 10% or more), which hasn’t happened since 2011.

“Overall measures of equity valuations are on the high side but not outside of historical ranges,” Yellen reiterated Wednesday.

A Fed rate hike could make stocks less attractive to investors. It would also raise interest rates on U.S. bonds, which are considered safer investments.

Spring is coming, but a Fed rate hike could set the sun — at least for awhile — on the phenomenal gains investors have experienced in recent years.

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About thenoelteam

As a Broker with RE/MAX Alliance, I work energetically for my clients whether they are a buyer or seller. I help you achieve your goal of owning a home or getting the best price for your home in the shortest time possible. After graduating from UCLA with a degree in communications and finance, I was licensed in 1977 and since then I have sold over 3600 properties amounting to over $1 billion in sales. I currently rank in the top 10 in home sales for Colorado. I offer the same quality of service and superior communication to all clients, ranging from starter homes to multi-million dollar estates, commercial and income properties, relocations and foreclosures My goal is to provide you with the best representation possible whether you are buying or selling. Over the years, one of the things that I've discovered is that there is a difference in the way individual Realtors do business. For me, I have always felt that honesty and personal integrity are the foundations upon which a successful business and career are built and sustained. I have an extensive background and knowledge base in real estate, including financing, which has enabled me to provide outstanding, quality advice and service not found with many agents today. My commitment to communication creates a positive relationship between my client and myself that results in a successful property sale or purchase. My passion for real estate, commitment to my clients and personal integrity has helped me to achieve success placing me in the top 1% of all brokers in nationwide. In my career, I have earned a number of awards and received considerable recognition for my success but the most significant recognition comes from the fact that over 75% of my business comes from past clients. My success is a true measure of my client satisfaction.
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