Welcome to 2015. Thanks to increased momentum in the U.S. economy, this is widely expected to be the year in which the Federal Reserve, at long last, begins to raise short-term interest rates.
At the end of 2014 the central bank ended its bond-buying program, and it has suggested that it will begin increasing short-term interest rates as priorities shift from stimulating lending markets to preventing inflation.
Predicting the direction of interest rates and of the bond market is pretty much impossible. Investors who have made bets in the past have been burned time and again. Take last year, when loan rates fell in some markets and bond yields fell in a sign that many investors were looking for safer assets. This happened even as the stock market reached new highs and jobs growth reached a pace not seen in more than a decade.
“It’s very unusual that U.S. stocks and U.S. bonds would both have a very good year at the same time,” says David Lafferty, chief market strategist for Natixis.
If the Fed does act this year, expectations are that the rate increases will be subtle, with the first increase bringing rates from near zero to about 0.25 percent, and the next up to about 0.50 percent. Any action may not come until the second half of the year.
Still, the move could have a clear, albeit gradual, ripple effect across loan markets, increasing costs marginally for mortgages, car loans and credit card debt. Here is a look at where loan rates are projected to be by the end of the year, according to a survey from Bankrate.com, with some guidance on what — if anything — you should do to prepare.
“The Fed is starting to lay the groundwork for the eventuality of interest rate hikes,” says Greg McBride, chief financial analyst for Bankrate.com. “It’s only prudent for consumers to prepare themselves as well.”
Where rates are now: 3.99 percent average for a 30-year fixed rate loan
Projected rate for end of 2015: 4.75 percent average
Mortgage rates defied expectations last year by moving lower after investors became worried about lackluster economic growth and stock market volatility. Investors are feeling better about both of those fronts now, once again setting the market up to look ripe for an increase — but not a huge one. Bankrate is projecting that the benchmark 30-year fixed mortgage rate will stay below 5 percent in 2015. Worries over geopolitical risks or overreaction to announcements from the Fed could cause rates to jump as high as 4.8 percent or 4.9 percent, though perhaps only temporarily.
Even a modest increase can increase monthly mortgage costs, depending on the size of the loan. On a $200,000 loan, a rise in mortgage rates to 4.75 percent from 4 percent could increase monthly payments by about $88, McBride estimates. On a $500,000 loan, the difference is $221 a month. But those potentially higher costs are no reason to rush into a mortgage, he says. “I don’t think you time your purchase based on interest rates any more than you time your marriage on a sale at the bridal shop,” McBride says. “Mortgage rates are not going to be a deterrent to a qualified buyer in 2015.”
Home equity loans and lines of credit
Where rates are now: 4.72 percent average for a HELOC; 6.03 for a home equity loan
Projected rates for end of 2015: 5.2 percent average for a HELOC; 6.5 percent for a home equity loan
Rates on both home equity loans and lines of credit won’t change much during first half of the year, at least not until the Fed raises short-term interest rates. The change to home equity lines of credit may be more pronounced. But increased competition between lenders could work as a counter force to help keep rate increases low. But lender competition will restrain the pace of rate increases down.
Where rates are now: 4.12 percent average on a five-year new car loan; 5.19 percent average on a 4-year used car loan
Projected rates for end of 2015: 4.35 percent average on a five-year new car loan; 5.40 percent average on a four-year used car loan
Rates on new car loans have fallen faster than rates for used car loans in recent years, but both kinds of rides could get more expensive if the Fed raises interest rates during the second half of 2015. The good news is that worthy borrowers shouldn’t have any trouble, because the best financing deals are reserved for the borrowers with the best credit. A borrower with credit score of 720 and up might pay about $6,000 less in interest charges over the life of a five-year loan than someone with fair credit, or a score between 620 and 659, according to a report released last fall by Wallet Hub. Plus a modest increase in auto rates of 0.50 percentage points would only have a minor effect on monthly payments, increasing them by about $6 a month for a $25,000 loan, McBride estimates.
Where rates are now: 15.7 percent average on a variable rate card
Projected rate for end of 2015: 16.2 percent average
Consumers hoping to land a credit card with a zero percent introductory rate better act fast. “The number of those will start to dwindle when rates start to jump up,” McBride says. Such cards, which don’t charge interest initially on balance transfers and credit card purchases can help consumers lower borrowing costs and pay down debt quickly. Some card issuers may continue to raise rates on card offers consumers with less-than-stellar credit scores, as they have been over the past several years. The lesson: pay down debt and apply for balance transfers before those costs rise.
Certificates of deposit and savings rates
Where rates are now: 0.27 percent average for a one-year CD; 0.86 percent average for a five-year CD
Projected rates for end of 2015: 0.5 percent average for a one-year CD; 1.25 percent average for a five-year CD
Yields on longer-term CDs, those that mature between two and five years, will move up slowly, only picking up pace once the Fed’s rate increases are in full swing. Short-term CDs, or those that mature in less than two years, may track the Fed’s increases more quickly. But don’t rush to lock up all of your savings. Rates may come up, but they’d be doing so from historically low levels. “It’s not enough to put you ahead of inflation,” McBride says, “but it’s certainly a step in the right direction.” And don’t expect all banks to respond equally to the Fed’s decision. Some banks may raise rates more than others, and some may not raise them at all at the start, McBride says.