Everyone is affected by raising interest rates, but different people are affected in different ways. CNN Money describes how a typical American (homeowner, spender, etc.) is affected by interest rates.
Interest rates are simply the cost of borrowing money; the prices paid by institutions trickle down to the consumer. So if you’re in the market for a home, the mortgage rates offered you are a reflection of the terms the banks can secure from institutional lenders. As their rates rise, so do yours.
People looking to buy a house with a mortgage will do best to borrow when rates are low, although the rates may affect the selling price. When rates are low, more competition for houses may drive the prices higher.
Those who own a home with an adjustable rate mortgage are stuck. The house was already purchased, but the APR will rise with the interest rates.
What about those who spend with credit cards, carrying a balance month to month? Since the cost of banks borrowing money has increased, they will pass that expense onto the customers as higher interest rates charged.
While there’s no specific link between the 10-year Treasury yields and credit card interest rates, the average on variable rate cards has also shot up almost three percentage points in the past year… That’s because the variable rate is tied to the prime rate, which tracks the fed funds rate, the interest banks change each other for overnight loans.
For those Americans lucky enough to have no debt and money in savings, the raising rates mean something different — the interest paid to these people will increase. Savings banks usually increase their rates as the Fed Funds rate increases, and some banks are more responsive than others. Emigrant Direct currently offers an annual percentage yield of 4.5%, and that’s one of the best rates available for a no-minimum, no-fee savings account.
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I am sooo glad we refinanced our mortgage when the rates were low, and at the same time took it down to a 15 year instead of 30 year mortgage. I’ll be watching the bond market if rates continue to climb.
To say that net savers uniformally benefit from interest rate increases is a bit simplistic. If you bought a bunch of long-dated bonds and the interest rate goes up, you are NOT a happy camper.