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This Wednesday, the Federal Reserve announced an increase of 0.5% in its short-term benchmark interest rate, marking the largest increase since 2000.
With this decision, the Fed seeks reduce demand for goods and services of consumers by making it more expensive to borrow money to buy a house, a car or other necessities.
A drop in demand could help control inflation, which accelerated to 8.5% in Marchthe largest increase since 1981.
However, an increase of half a point could translate into higher costs that could affect the budget of families who had already become accustomed to making purchases with low interest rates.
How much will this rate hike cost you?
Each 0.25% increase in interest rates equals An additional $25 a year in interest for every $10,000 in debt. So a 50 basis point increase will translate to an additional $50 in interest for every $10,000 in debt.
However, economists forecast that the Fed will not stop raising rates after Wednesday’s announcement.
By the end of the year, the federal funds rate could reach 2% or moreas he told CBSJacob Channel, Senior Economic Analyst at LendingTree.
That implies a rate increase of about 1.5% from current levels, meaning that consumers could pay $150 in additional interest for every $10,000 in debt.
If there’s an upside for consumers, it’s that savings accounts and certificates of deposit could offer higher returns.
However, experts point out that this situation is problematic in a period of high inflation. Even with those higher rates, savers are essentially eroding the value of their money.
What will happen to mortgage rates?
Home buyers have already been hit by rising mortgage rates, which have risen about two percentage points in a year, topping 5%.
A buyer purchasing a $250,000 home with a 30-year fixed loan at last week’s average rate of 5.3% will pay $3,300 dollars a year more compared to what you would have paid with the same mortgage in April 2021, according to figures from the National Association of Realtors.
Now, to that increase is going to be added the figure of this Wednesday’s announcement.
Home Equity Cards and Lines of Credit
Many consumers will feel the increase through their credit cards, according to the expert consulted by cbs, Matt Schulz.
“Your credit card debt is going to get more expensive quickly and it’s not going to stop anytime soon,” Schulz said. After the Fed’s March hike, credit card interest rates increased by 75%, he said.
Other types of credit with adjustable rates may also see an impact, such as home equity lines of credit and adjustable rate mortgageswhich are based on the prime rate.
Auto loans may also rise, although these may be more sensitive to competition for buyers, which could cushion the impact of the Fed’s hike.
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