With inflation soaring to its highest levels in decades, the U.S. Federal Reserve has announced that it will unwind bond buying and implement several rate hikes throughout 2022. Many experts anticipate there will be at least six rate hikes from the Fed and that the federal borrowing rate will increase by a total of 150 basis points.
When this happens, consumers who depend on financing for things like homes and student loan refinancing will be affected by the rising federal interest rate. For people with variable rate loans or who are looking to refinance, read on to learn the impact of the rising Fed rate.
Mortgages
Anyone considering buying a home or refinancing their mortgage will want to act soon. Since fixed-rate mortgages are tied directly to the rate set by the Fed, borrowers can expect monthly payments to be higher as interest rates continue to climb.
To put this into context, someone borrowing $300,000 at a 30-year fixed rate of 3.5 percent will pay $1,347 per month. If rates go up to 5.0 percent, that same mortgage will be $1,610 per month and cost an extra $64,080 in interest over the life of the loan.
In addition, borrowers who opted for an ARM (adjustable-rate mortgage) may want to consider refinancing to a fixed-rate mortgage. Even though ARMs are based on the SOFR (Secured Overnight Financing Rate) instead of the previously used LIBOR (London Interbank Offered Rate), these figures will still eventually trend upward, taking monthly housing payments with them.
Student Loans
For people considering a student loan refinance, the sooner they can move forward and lock in a fixed rate the more they can take advantage of the historically low interest rates of the past two years. Since rates are expected to increase, refinancing or even consolidating a year from now could yield higher monthly payments. If your financial circumstances or your credit score has improved, it could be worth checking if you qualify for a lower rate.
Borrowers will need to keep in mind that refinancing a student loan does come with a few potential downsides. Refinancing federal student loans with a private lender leads to the loss of certain federal protections, such as the mandatory forbearance period and the possibility of lump sum debt forgiveness from the Biden administration.
For those in an advantageous position and looking to pay down their student loans aggressively, refinancing can offer the advantages of locking in a lower rate before interest rates rise and/or restructuring to a repayment plan that better meets their needs.
Contact: carolina.darbellesv@iquanti.com
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Original Source: Laurel Road: What the Rising Federal Interest Rate Means for Refinances
