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The Fed sets the stage for a rate hike. Here’s what that means for


The Federal Reserve laid the groundwork for interest rate hikes Wednesday.

At the conclusion of its two-day meeting, the central bank said it will aggressively unwind last year’s bond buying after a variety of inflation reports reached their highest levels in decades.

Although interest rates will stay near zero for now, Fed officials set the stage for the first of multiple rate hikes starting as soon as March as they look to contain soaring inflation.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the central bank said in a statement.

“The Fed got the memo,” said Greg McBride, chief financial analyst at Bankrate.com.

How the federal funds rate affects you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

Now that the central bank’s easy money policies are about to end, consumers will have pay more to borrow and still barely benefit from better rates on their deposits.

Further, the first rate hike will be just the beginning, McBride noted. “The last time the Fed raised rates, it raised rates nine times in a three-year period.”

“The cumulative effect of rate hikes is what is really going to have an impact on the economy and household budgets,” he added.

The cost of borrowing will rise

As the Fed unwinds its bond purchases, long-term fixed mortgage rates are edging higher, since they are influenced by the economy and inflation.

The average 30-year fixed-rate home mortgage has already risen to 3.75%, and is likely to climb to 4% by the end of 2022, according to Jacob Channel, senior economic analyst at LendingTree.

The same $300,000, 30-year, fixed-rate mortgage would cost you about $1,389 a month at 3.75%, while it would cost $1,432 at a 4% rate. That’s a difference of $43 a month, or $516 a year, and $15,480 over the lifetime of the loan, according to LendingTree. 

If rates rise to 4.5% then you would pay $131 a month more or another $1,572 each year, and $47,160 over the loan’s lifetime.

As rates rise, there are fewer opportunities to refinance, although borrowers with a good credit score can still find annual percentage rates around 3.25% for a 30-year, fixed-rate refinance loan, and 2.62% for a 15-year, fixed-rate loan, according to Lending Tree.

“Waiting has cost you big time,” Bankrate’s McBride said. “If you are paying a rate over 4%, you can still benefit but it’s going to be more modest.”

“Buyers who are worried about how rising rates will impact them should work on boosting their credit score and saving up as much cash as possible before they apply for a loan,” Channel said.

“The more money that they can put toward a down payment and the higher their credit score is, the better the rate they’re likely to be…


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