Here’s what the Fed’s rate hike means for borrowers, savers and homeowners

The Federal Reserve raised its target federal funds rate by a quarter percentage point.

The first increase in the benchmark rate in three years will lay the groundwork for six more hikes by the end of the year.

The war in Eastern Europe gives the Fed reason to act more cautiously, but they will still be working to corral what is already the highest inflation in 40 years.

The central bank sets the federal funds rate, which is the interest rate at which banks borrow and lend overnight. The Fed's moves affect the borrowing and saving rates they see every day.

One quarter-point rate hike from near zero levels will have a minimal impact on household finances. He said that this is just the beginning.

The cumulative effect of rate hikes is what will have an impact on the economy and household budgets.

Mortgage rates are influenced by the economy and inflation.

According to Jacob Channel, senior economic analyst at LendingTree, the average 30-year fixed-rate home mortgage is likely to keep climbing.

• 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.

Many homeowners with home equity lines of credit, which are pegged to the prime rate, will be more directly affected. A home equity line of credit, or HELOC, adjusts immediately, while most ARMs adjust once a year.

Mark Scribner, managing director of Oxygen Financial in Boston, said that anyone with a variable-rate loan may want to switch to a fixed rate.

Borrowing rates on credit cards will quickly head higher.

Since most credit cards have a variable rate, you can expect it to rise within a billing cycle.

• 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. If the APR edges up to 20%, you’ll pay an extra $73 in interest.  

A single quarter-point rate increase isn't likely to change things. The rate hikes are bad news for people with credit card debt.

If borrowers call their card issuer and ask for a lower rate, they could switch to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a low-interest personal loan.

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising, so if you are planning to finance a new car, you'll shell out more in the year ahead.

Car buyers took out loans for a new vehicle at an average of $39,721 in 2021, an increase of over $4,000 from a year earlier. The monthly loan payments hit a record high.

• 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.

The Fed's rate increase won't have any effect on the rate you get.

Federal student loan rates are fixed, so most borrowers won't be affected by a rate hike. If you have a private loan, it is possible to have a fixed or variable rate, which means that you will pay more in interest as the Fed raises rates.

It's a good time to identify the loans you have outstanding and see if you can get rid of them.

The Fed has no direct influence on deposit rates, but they are related to the federal funds rate. The savings account rate at some of the largest retail banks is currently a mere 0.05%.

Deposit rates will be slower to respond as the Fed raises it benchmark rate.

Many banks are not going to be passing along higher rates to savers, so where you have your money parked is going to be important.

Personal Finance explains why the Fed raises interest rates to combat inflation.

The average online savings account rate is at least three times higher than the average rate from a brick and mortar bank thanks to lower overhead expenses.

• If you have $10,000 in a regular savings account, earning 0.06%, you’ll make just $6 in interest in a year. In an average online savings account paying 0.46%, you could earn $46, while a five-year certificate of deposit could pay nearly twice as much, according DepositAccounts.com.

Money in savings loses purchasing power over time because the inflation rate is higher than all of these rates.

Yiming Ma, an assistant finance professor at Columbia University Business School, said to look for other options with better rates.

She said that there are alternatives out there that will require taking on more risk but will give you increased returns.

Ma said to set aside enough cash to cover every day expenses so you are protected against the big ups and downs.

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