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What to Expect from the Fed Hike

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How the interest rate hike impacts you

by Chris O’Shea

The Federal Reserve recently announced an interest rate increase, and as you might guess, the move will likely cost you money. Although increases in the prime rate are often slow to show up in higher savings rates, they manage to increase rates on variable debts very quickly. That means you’re likely to see it in your credit card billing statements, adjustable-rate mortgages, home equity lines of credit, auto loans and more. The trick is to not let the rate hike throw your budget out of whack.

As Yahoo reports, the Fed raised the prime rate from 1.50 percent to 1.75 percent and said that Americans can expect at least two more hikes during this year. So what does this all mean for you? If you have an adjustable-rate mortgage (ARM), the rates get altered annually. The average five year ARM rate is currently 3.67 percent. If you have a $500,000 mortgage, the 0.25 percent increase could lead to an additional $1,250 in interest payments per year. If there are two more increases like the Fed expects, you could end up shelling out an extra $3,750 a year. As for credit cards, the average interest rate is roughly 14.99 percent. If you have a balance of $5,000, the rate hike could bump your payments by $12.50 a year (or $37.50 a year if the other two hikes happen).

Now that you know what to expect, you can make changes to your budget accordingly. The best offense is a good defense, so make small cuts from discretionary spending to free up the cash you expect to need to cover the hike. Prepare yourself now for the uptick in bills and you won’t be hammered by them when the rates start making waves.