Updated from 7:05 a.m. EDT
Consumers won't be waiting long to feel the squeeze now the
-- as expected -- raised interest rates by a quarter of a percentage point at its June meeting Wednesday.
By telegraphing its intent weeks in advance on growing signs that the economy is heating up, the central bank helped to move some rates up already. Auto loans and home equity lines of credit, also known as HELOCs, are already about 1 percentage point above their lows.
Brian Regan, chief consumer officer with LendingTree, is among the many who expect the Fed will inch the federal funds rate up by a quarter of a percentage point to 1.25% now and do the same again several times through the rest of the year. The federal funds rate is the rate banks charge one another for overnight loans.
LendingTree (www.lendingtree.com), a unit of
, allows consumers to shop for a variety of loan types from various lenders online.
This first increase, Regan said, will have an immediate impact on some home mortgages, HELOCs, auto loans and credit cards.
"Just as important as the rate increase is the message," Regan said. "It certainly will be the turning of the tide. There's definitely a high level of angst on the consumer's part."
Long-term mortgages, like the 30-year fixed rate, are already 1 percentage point above their 40-year lows of last year, because they are tied to the bond market where long-term interest rates have risen. And rates on shorter-term adjustable mortgages, which are more closely tied to what the Fed does, have moved up as well.
Some prospective home buyers have decided to move up to bigger homes now before rates get any higher, Regan said. Others are hunkering down and staying put.
Keith Gumbinger, vice president of HSH financial publications of Pompton Plains, N.J., which tracks a variety of loan products, said that consumers should remember that they were clamoring just a few short years ago to get the mortgage and other rates that are available today.
"People have lost perspective," he said. "We have gotten so tainted by cheap money today. It's going to be a painful adjustment."
It could be a confusing one as well. Because so much money can be made on housing appreciation these days, many folks are focused on mortgage rates when they think of interest rates. The more traditional mortgages, the 30-year and 15-year fixed-rate mortgages, move with the 10-year Treasury note, which reacts daily to economic news.
So, just as the Fed raises short-term rates a notch, it's possible that bond interest rates and rates on long-term mortgages could dip. "That's very possible," said Regan. "It's all about the economic data. People could be scratching their heads."
Here's how rising rates are likely to affect consumers on four types of loans:
Most current mortgage holders are insulated from interest hikes for now, said Gumbinger. Not only do many homeowners have fixed-rate mortgages, but the 30% who have some kind of adjustable-rate feature a three-, five-, seven- or even 10-year fixed loan with the adjustable portion at the end.
Borrowers who could feel an immediate pinch are those who have taken out newer products such as adjustable-rate mortgages, or ARMs, that are fixed for just three months, then float with shorter-term rates, which are currently in the 4% range.
ARMs typically can increase by no more than 2 percentage points a year and 6 percentage points over the life of the loan, said Gumbinger. Letting a mortgage lapse from a fixed to an ARM down the road in hopes of getting a better deal then could be a bad gamble.
"That's folly," he said. "If interest rates have risen, all interest rates have risen."
Homeowners shouldn't select a loan based so much on the rate, as on how long they plan to be in the home. If they expect to live out their lives there, they should get a 30-year fixed-rate, but if they know for certain they'll be gone in five years, they should look at another product, like a 5-1 hybrid, that's fixed for five years, then becomes an adjustable.
Consumers influenced by Fed Chairman Alan Greenspan's positive comments about ARMs might want to consider that they were likely aimed at lenders as well, who will have many money-losing, low-interest loans in their portfolios as rates rise.
While last year's refinancing boom is not likely to happen again soon, Regan said there are still good reasons for some homeowners to refinance. If their credit ratings have improved, they could qualify for lower rates. If they have been paying private mortgage insurance (PMI), increasing home values might make that unnecessary. (For a ballpark estimate, check free home valuation calculators on LendingTree.com and at www.bofa.com.)
Home Equity Lines
The interest rates on these now-common loans, which reached record popularity in 2003, are tied more directly to what the Fed does. But the good news is that unlike a mortgage, the average credit line is measured in the tens of thousands, not the hundreds of thousands.
The typical line of credit is $30,000 to $50,000, with a rate of about 4%. Gumbinger figures interest rate hikes won't start to smart until rates hit about 7%.
Regan predicted it might take a year for rates to get to that point. In the meantime, he said, consumers have found HELOCs a good deal for debt consolidation, home improvement and even as a way to help finance a home purchase through so-called "piggyback" financing. "It's kind of smart debt," he said. "It's very versatile."
Even though there are now officially more cars in the U.S. than there are licensed drivers, auto financing is a relatively murky area. Rates on loans from banks and other lenders vary considerably.
But one thing is clear. As rates rise, the super-low rate deals that automakers offered on new cars are going to evaporate. Many would-be car buyers found that the incentive financing offered by manufacturers was reserved for a very few buyers with top-notch credit.
Many car dealers offer financing at high rates. And about 21% of consumers drive off the lot with leased cars (down from a high of 36% in 1998, according to CNW Marketing Research in Bandon, Ore.), and these loan rates are often difficult to determine.
"You've started to see zero financing has disappeared," said Gumbinger. "Now you see 1.5%. The underlying cost is rising."
Rates offered by independent lenders are already on the rise, from about 5% last year to 6% now, in line with five-year Treasuries, said Regan. He said his company often arranges overnight financing, using HELOCs that allow buyers to go in with a blank check that gives them more leverage when negotiating car prices and lets them avoid "captive financing."
Regan said that as rates -- and gas prices -- go up, some consumers could well choose to lower their costs, selecting a Chevy Blazer over an SUV Yukon or a Taurus over a Mustang.
Interest rates on credit cards for borrowers with top credit ratings are based on short-term rates, currently the prime rate (4%), plus about 2%. So far, said Regan, credit card rates haven't moved much.
But offers of 0% on transferred balances could begin to slow down.
"The credit card companies are fighting for a smaller piece of the pie," said Regan. With HELOCs so easy to acquire and inexpensive, he said, "Who would leave a balance outstanding on a credit card?"
Before joining TheStreet.com, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at