How the Fed’s rate hike will affect LIers’ portfolios

Long Islanders will soon face higher borrowing costs for credit cards and auto loans — and slightly better savings rates — following the Federal Reserve’s hike in its rate benchmark by three-quarters of a percentage point on Wednesday.

It was the third consecutive increase of this magnitude as policymakers sought to rein in stubbornly high inflation. The increases make it more expensive for consumers and businesses to borrow money.

The Fed rate has a more direct influence on short-term borrowing such as car loans and credit card interest rates than on longer-term lending such as mortgages. But factors such as inflation and Fed increases have helped push up mortgage rates, making buying a home much more expensive.

The average 30-year mortgage rate for the week ending September 15 was 6.02%, more than double the average for the same period last year of 2.86%. This spike means that a buyer who buys a home this year with the same size mortgage will be paying hundreds of dollars more each month on their mortgage to cover additional interest costs.

The 30-year mortgage rate more closely tracks the yield on 10-year US Treasuries, which hit their highest level since April 2011 earlier this week as investors demand higher yields for holding government debt .

And while the Fed’s decision doesn’t directly affect mortgage rates, changing credit card and auto loan rates can still influence what a homebuyer can afford, said Andrew Russell, founder and owner of RCG Mortgage, a mortgage broker in Hauppauge.

“It carries over to a buyer’s qualification,” Russell said.

Mortgage professionals can help customers determine whether they should pay off their debt to qualify for a better interest rate or use a larger down payment for their purchase, he said. Also, higher mortgage rates that push some buyers out of the market can reduce competition for homes, helping buyers who still qualify for loans, he said.

“Even though the rates are a little higher, earlier in the year you should have paid more for this house,” Russell said.

But even as higher rates slowed home sales on Long Island, prices remained high, with the median sale price in August being $700,000 in Nassau and $565,000 in Suffolk.

Zahra Jafri, founder and chairman of Lynx Mortgage Bank in Westbury, said she expects mortgage rates to continue to rise as the Fed tries to tame inflation. Still, Long Island may not see declining housing demand the same as other areas.

“What separates us from different parts of the country is that we still have a supply problem,” Jafri said. “There are always more buyers than sellers.”

For mortgage rates to return to lower levels, investors will need to see signs of economic weakness, such as rising unemployment and falling GDP, which would prompt more government bond purchases, a said Taylor Marr, deputy chief economist at Redfin. Consumer uncertainty about the direction of the economy bodes ill for home sales.

“You don’t want to make really big financial decisions right now, like buying and selling real estate for the most part, if you feel like your job is uncertain,” Marr said.

Here are more ways the Fed’s rate hikes will affect Long Islanders:

Credit card

Even before the Fed’s decision on Wednesday, credit card lending rates hit their highest level since 1996, according to Bankrate.com, and those will likely continue to rise.

Those who don’t qualify for low-rate credit cards due to low credit scores are already paying much higher interest on their balances, and they will continue to do so.

As rates have risen, zero percent loans marketed as “buy now, pay later” have also become popular with consumers. Yet longer-term loans of more than four installments offered by these companies are subject to the same increased borrowing rates as credit cards.

Home Equity Loans

For people with home equity lines of credit or other variable-interest debt, rates will rise by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on the banks’ prime rate, which tracks the Fed’s rate.

Car loans

Auto loans are at their highest level since 2012, according to Bankrate.com’s Greg McBride. Rates on new auto loans are expected to rise almost as much as the Fed’s rate hike.

Not all of the increase is always passed on to consumers; some automakers are subsidizing fares to entice buyers, said Jessica Caldwell, executive director at Edmunds.com. Bankrate.com reports that a 60-month new vehicle loan averaged just over 5% last week, down from 3.86% in January. A 48-month used vehicle loan was 5.6%, down from 4.4% in January.

CDs, money market accounts

Savers will start to see a small benefit.

Lawrence Sprung, founder of investment firm Hauppauge Mitlin Financial Inc., said returns on some money market accounts have risen from zero to 1-2% in recent months.

“They had a huge run,” he said.

This increase, however, still puts these short-term investments well below the inflation rate of around 8%, he said.

On Wednesday, the Mineola-based Hanover Community Bank website advertised a six-month certificate of deposit with a $500 minimum and an annual percentage yield of 1.5%.

“Investors need to be careful and watchful,” Sprung said. “If inflation stays at those levels, you still don’t get a real return.”

— with Ken Schachter and AP

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