If you haven’t locked into a fixed rate on your mortgage and other loan products, then now might be the time!
On December 12th, the Federal Reserve raised the federal funds rate, which moves the Prime Rate. The Federal Reserve’s actions resulted in a prime rate increase of 0.25%, moving the Wall Street Journal (WSJ) Prime Rate from 4.25% to 4.50%. It’s a familiar story —this was the third time the Federal Reserve has raised the Prime Rate in 2017, the New York Times reports.
With a rate that’s been raised three times in the past year, surely the hikes are bound to slow down, or stop, right? Not necessarily. The New York Times suggests the Federal Reserve will raise the interest rate at least three more times in 2018. So, if you don’t have a fixed or blended rate on your mortgage or other loan products, it might be best to make the change from variable rates now, while you can still take advantage of the 4.50% rate.
Why does the Prime Rate Change?
Remember when you were a kid and your parents kept telling you to slow down, or stop running in the house? Well, like a parent, the Federal Reserve uses the Prime Rate to support the economy. It can’t control the economy (no more than we can control our kids). But with small suggestions and changes, the Federal Reserve hopes to direct things in a safer direction.
The Federal Reserve prefers slower economic growth because it’s trying to protect the economy over the long-term. Low rates cause people to borrow more than they can afford. If the economy suddenly takes a downward turn many Americans may stumble or fall and find themselves in over their heads.
Feeling the Squeeze? Think of it as a Hug
Fortunately, the U.S. economy is doing so well that the Federal Reserve feels it needs to slow it down with rate hikes. This is good news, because it means our economic outlook is strong and the economy is expected to continue to do well throughout 2018. On the other hand, for those of us with certain variable rate loans and credit lines, it means we’ll all be paying more in interest.
What is the Difference Between the WSJ Prime Rate and the US Federal Funds Rate?
The Wall Street Journal Prime Rate is “the base rate on corporate loans posted by at least 70% of the 10 largest U.S. banks.” Although they often move together, this rate is not the same as the federal funds rate set by the Federal Reserve, which is the interest rate that financial institutions use to lend reserve balances (the amount held at the Federal Reserve to ensure a financial institutions’ reserve requirements are met).
Most financial institutions and lenders, including BECU, use the WSJ Prime Rate to set their interest rates. For this reason, a change in the WSJ Prime Rate will impact every facet of the economy, including the products offered at BECU.
Carrying a Balance on Your Credit Card and Loans Just Got a Little More Expensive
Those products that have interest rates based on the WSJ Prime Rate will see a rise. For example, the BECU VISA® credit card has a variable annual percentage rate, or APR, tied to the WSJ Prime Rate.
A variable rate is an interest rate that changes. Most variable rates are tied to the Prime Rate, with an added margin on top. The margin isn’t changing in this case, just the Prime Rate itself. This means your BECU VISA® interest rate will go up, whether you’ve got a personal or a business card. The same goes for your BECU business line of credit and home equity line of credit (see the end of this article for a list of other BECU products impacted by WSJ Prime Rate).
Your Variable Rate Mortgage Just Got a Little More Expensive Too
Good news for our members with a BECU home loan with a fixed rate; nothing is changing for you. If you have an adjustable/variable rate mortgage (ARM), then your rate may be changing, depending on your financial institution, term and how long you’ve had the mortgage.
It’s important to note that just because you have an adjustable rate mortgage doesn’t necessarily mean that a change in the WSJ Prime Rate will result in an increase in your ARM.
BECU’s ARMs are tied to the 1-year London Interbank Offered Rate (LIBOR) not the WSJ Prime Rate. LIBOR is a benchmark rate used by some of the world’s leading financial institutions for short-term loans. It’s important to check with your financial institution to see what index your adjustable rate mortgage is tied to and ask whether your ARM has increased.
If it has, don’t fret. Interest rates are still historically low. NerdWallet is quick to point out that over the last 44 years mortgages have averaged 8%, but most are currently around 4% or 5%. So, although the Federal Reserve has been raising the Prime Rate, mortgage rates are still at unusual lows.
If you’re in the market for a new mortgage, you’re still going to benefit from lower-than average rates, even if you don’t buy your next house before the Federal Reserve’s next Prime Rate increase.
Ways to Deal with Rising Interest Rates
Consumer Reports has some great advice in light of the Prime Rate change, including paying as much of your debt as possible, especially credit card debt. The reasoning is simple: if you’re worried about how much interest you’ll accrue, paying down the principle is a sure-fire way to alleviate these concerns (and the amount of interest you’ll pay overall).
Of course, as we’ve mentioned you can also consider choosing a fixed rate BECU product because it’s very likely the Federal Reserve has more Prime Rate hikes planned. The move doesn’t make sense for everybody, though. So much depends on your personal circumstances, but moving to a fixed rate loan is certainly something to discuss with your BECU Financial Health Specialist.
The Silver Lining
Increased rates mean higher revenue for financial institutions. Being not-for-profit, BECU is now tasked with looking for ways to return even more money to members, whether it be increased rates on deposit accounts, additional services, or the reduction/elimination of fees.
Higher interest rates also mean that fewer people will be buying big ticket items like homes, which usually drives down prices in the real estate market, providing a nice opportunity for savvy buyers.
You can also look forward to an overall healthier economy, which should translate to more job opportunities and higher wages.
What BECU Loan Products are Increasing and When?
The following BECU loan products have an APR based upon the Wall Street Journal Prime Rate and will increase on the specified dates (remember, BECU adjustable rate mortgages are tied to the 1-year LIBOR and will fluctuate against that index):
Rate change was effective on December 18, 2017
Business Line of Credit (Secured and Unsecured)
Rate change was effective on January 1, 2018
Home Equity Line of Credit
Rate change will be effective on February 1, 2018
Rate change will be effective on July 1, 2018
Existing Student Loans
What factors do you look at when considering a mortgage or loan product? How will the Prime Rate change impact your budget?