Your debt may cost you more if the Fed hikes rates. But just when is the question. June 11, 2004: 2:55 PM EDT
By Jeanne Sahadi, CNN/Money senior writer
NEW YORK (CNN/Money) – You're probably expecting to feel a pinch when the Fed decides to hike its target for the Fed funds rate, the overnight lending rate between banks. That's because it can have a domino effect on a host of interest rates consumers pay.
But just when that pinch will affect your wallet depends on the type of debt you're carrying or hoping to finance.
Here's a look at what will be affected -- and when -- when the Fed does hike rates.
Credit cards: If you have a variable rate card, your rate is determined by a formula tied to the prime rate, which is the rate at which banks lend to their most creditworthy customers. The prime rate tends to move up when the Fed funds rate does.
But that doesn't mean your credit card rate will.
If the Fed hikes rates in June you're likely to see an increase in rates by the end of summer, said Robert McKinley, founder of CardWeb.com, in an email exchange.
But if the Fed makes its move after July 1, "then it will slow down the rate pass-through until the fourth quarter for some variable-rate cards," he said.
If you have a fixed-rate card – which accounts for nearly 60 percent of all cards -- don't be fooled by the word "fixed." Issuers can change the rate or switch the structure from fixed to variable so long as it gives at least 15 days notice.
They typically don't do this unless they anticipate a rate hike of at least 50 basis points, McKinley noted. "Based on what we have seen so far, we expect issuers will accelerate the migration back to variable rates so they can easily pass on the rate hikes."
Mortgages: Mortgages are not tied to the Fed funds rate, but tend to track the yields on various U.S. Treasurys and other indexes. Those instruments do price in rate hikes in advance, among other things.
CNNfn's Kathleen Hays takes a look at which areas of the country will be hardest hit, and what are the trends to be watching in order to get the best price when it comes to selling or buying your home.
As a result, mortgage rates – particularly those with very short-term fixed rates, such as three- or six-month adjustable rate mortgages (ARMs) or interest-only loans -- have already begun their climb past record lows.
So if you have a mortgage with a very short-term fixed rate, it's likely your payment has already been affected or will be soon.
If, on the other hand, you have a 10-year or 30-year fixed-rate mortgage or a 5/1 or 7/1 ARM (in which you've locked in a rate for five or seven years), a Fed rate hike won't affect you in the near term.
"The longer the fixed rate, the more insulated you'll be," said Keith Gumbinger, vice president of mortgage information provider HSH Associates.
If you're shopping for a new mortgage – fixed or adjustable – or you have a short-term ARM, you may see rates continue to climb as the market anticipates more rate hikes in the offing later this year.
Home equity lines of credit (HELOCs): Most HELOCs have adjustable rates tied to the prime rate. So if you're shopping for one, you'll see rates rise almost immediately if the Fed hikes its rate.
But if you already have one, you may get a small reprieve before your payments go up. You'll probably have at least one billing cycle before you feel any effect, Gumbinger said.
And in some cases you may have as long as three billing cycles, if your lender bases HELOC rates on the prime rate that was in effect 90 days ago.
You may not feel the effects of a summer rate hike at all if you're already paying a "floor" rate on your HELOC. The "floor" is the base rate below which the lender will not go.
Since rates fell so far in the past few years, some HELOCs have been sitting at their floors, according to Gumbinger. So even with a rate hike, the new HELOC rate (equal to the new prime plus a margin the lender sets) may still be less than your floor.
Home-equity loans (HELs): Most HELs are fixed-rate loans. If you have one, you're insulated from a Fed rate hike.
But if you're shopping for one, you can expect higher rates. That's because a home-equity loan rate is broadly tied to the lender's own cost of funds. A Fed hike means the lender's cost of borrowing from other banks will go up.
"If it costs them more, it'll cost you more," Gumbinger said.
Car loans and leases: Both are fixed-rate products. So if you already have one, don't worry about what the Fed does.
But if you need a car loan or lease, you'll see rates have already begun to climb.
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As with mortgages, car-financing rates are not tied to the Fed funds rate. Rather, movement in the yields on the 2-year and 5-year Treasurys might serve as benchmarks, said Brian Reed, a vice president at Capital One Auto Finance. And both have been on the rise.
Currently, the bond market has priced in a small Fed rate hike. Should the Fed increase rates more than expected, Reed said, you may see car financing rates move higher.
Student loans: This is one area you may actually see your rates go down for the 12-month period beginning July 1.
That's because student loan rates are not tied directly to the Fed funds rate.
YOUR E-MAIL ALERTS
Already at historic lows, interest rates for federally guaranteed, variable-rate student loans that were issued after July 1,1998 will drop 0.05 percent, based on the results of the last auction in May of the 91-day Treasury bill to which the rates are tied.
For more on this and whether it makes sense for you to lock in the new rates by consolidating your loans, click here.
Editor's note: This article, originally published in May, has been updated.