Millions of American homeowners and credit card users could face higher borrowing costs if the Federal Reserve raises interest rates again this year, as policymakers continue to grapple with persistent inflation.
Minutes from the Fed’s September meeting, released on October 7, indicated that most policymakers believed another increase in the federal funds rate would likely be appropriate before the end of the year. The central bank raised its benchmark rate by a quarter of a percentage point at that meeting, bringing the target range to 3.75% to 4%.
The minutes do not guarantee another increase, but they highlight the possibility of further tightening as inflation remains a concern.
“The plain fact is that inflation is too high, and has been for too long,” Fed Chair Kevin Warsh said at his September press conference.
For households already managing rising living costs and outstanding debt, another rate increase could add pressure to monthly budgets. The impact, however, would vary depending on the type of loan, its terms and when its interest rate adjusts.
The Fed’s next decision is scheduled for October 28, giving borrowers an opportunity to review their finances and consider their options before the announcement.
Adjustable-Rate Mortgages Face Potential Payment Changes
Approximately 3.1 million active adjustable-rate mortgages (ARMs) are outstanding in the United States, according to Intercontinental Exchange. Unlike fixed-rate mortgages, these loans can see their interest rates change after an initial fixed period, potentially increasing homeowners’ monthly payments.
Not all borrowers face an immediate adjustment. However, homeowners with ARMs can prepare by checking when their current rates stop being fixed and when their next adjustments are scheduled.
Borrowers can also contact their mortgage servicers to request estimates of their expected payments after an adjustment, as well as the highest payment permitted under their loan terms.
An ARM’s interest rate generally follows a benchmark index plus a margin set by the lender, subject to contractual limits on how much the rate can change. The specific terms of each mortgage determine when and how significantly payments may increase.
For homeowners concerned about affordability, refinancing may be worth considering before a scheduled adjustment. Comparing offers from several lenders can help borrowers evaluate interest rates, closing costs and repayment periods.
Freddie Mac recommends obtaining quotes from three to five lenders when shopping for a mortgage. Even a relatively small reduction in the interest rate can translate into savings over the life of a loan.
Homeowners can also review other housing expenses, including insurance premiums, and compare available policies to determine whether they could obtain comparable coverage at a lower cost.
Credit Card Balances Could Become More Expensive
Americans held approximately $1.26 trillion in credit card balances during the second quarter, according to the Federal Reserve Bank of New York.
For consumers who carry balances from month to month, another increase in interest rates could make existing debt more expensive. Many credit cards have variable interest rates that can move with the benchmark rates they follow.
Borrowers can start by reviewing their latest statements to check their interest rates, outstanding balances and estimated repayment periods if they make only minimum payments.
Paying more than the minimum amount due, when financially possible, can help reduce outstanding balances faster and limit the interest accumulated over time.
Consumers with multiple high-interest debts may also consider whether consolidating them through a personal loan would lower their overall borrowing costs. However, the benefits depend on the interest rate, fees and repayment term. Borrowers should compare the total cost before committing to a new loan.
Those carrying substantial debt may also explore debt relief options, but they should carefully review the terms and potential consequences before enrolling in a program.
Home Equity Offers Another Borrowing Option
Homeowners may also consider a home equity line of credit, or HELOC, to consolidate expensive debt or cover major purchases. A HELOC allows borrowers to access funds using their home equity while keeping their existing first mortgage in place.
Because the property serves as collateral, a HELOC may offer a lower interest rate than a credit card. Borrowers can draw funds as needed during the borrowing period and generally pay interest on the amount they use.
However, using home equity to pay off other debts carries a significant risk: failure to repay the loan could put the home at risk. Homeowners should assess their repayment capacity and compare the costs and terms of available options before borrowing.
Higher Rates May Benefit Some Savers
Although rising interest rates can increase borrowing costs, they may also create opportunities for savers to earn more on their cash.
Banks do not always pass higher rates on to depositors as quickly as they adjust borrowing costs. As a result, consumers may benefit from comparing the annual percentage yields offered by different savings accounts.
High-yield savings accounts can provide a way to earn interest while keeping emergency funds accessible. Before opening an account, savers should review its current rate, fees, withdrawal conditions and applicable deposit insurance arrangements.
Rates and promotional offers can change, so consumers should verify the terms directly with the financial institution before making a decision.
What Borrowers Should Watch Next
The Federal Reserve’s upcoming decision will be important for households assessing their borrowing and savings options. Although the September meeting minutes indicated that most policymakers expected another rate increase to be appropriate by year-end, the decision had not been finalized in the information provided.
Consumers do not need to wait for the announcement to review their finances. Homeowners approaching mortgage adjustments can examine refinancing options, credit card borrowers can reassess repayment strategies, and savers can compare deposit rates.
Preparing in advance can give households more time to evaluate alternatives and understand how potential changes in borrowing costs could affect their budgets.