Impact of Rising Interest Existing Debt


This month, the Federal Reserve raised the benchmark interest rate for the second time in four months. A stable economy and strong employment numbers encourage economic growth, which could lead to higher levels of inflation, prompting the rate increase. Rising interest rates are good news to those looking for fixed income investments but bad news for those holding variable debt.

Impact on Mortgage Loans

Adjustable Rate Mortgages, also known as ARMs, begin at a fixed rate for a set period and then adjust each year on the anniversary of the loan. Anyone with an adjustable rate mortgage using Prime Rate as the Benchmark will see a correlating increase when the loan rate adjusts for 2017. Each adjustment locks in the new rate for another 12 months.

Impact on Equity Lines of Credit

An HELOC is a revolving line of credit using the equity in your home as collateral. They feature low-interest rates and adjust the month following a rate increase. For example, if the Federal Reserve raises rates on the 15th of the month, the new rate on the line of credit will occur the first of the following month and apply to current and future balances. Most rates will remain under 5% making it an affordable loan option despite the increases.

Impact on Credit Cards

Credit card companies establish a rate with a margin against Prime. When the index rises, the corresponding rate changes on existing balances, and future purchases. For example, if the Federal Reserve raises the rates by 0.25%, then each credit card will see an increase in the rate of 0.25%. Since credit cards compound interest daily, rather than monthly, the effect is both immediate and exponential.

With the Federal Reserve positioned to raise rates again before the end of the year, converting variable rate debt into a fixed rate loan could save you money.