Last week the Federal Reserve raised interest rates.
Believe it or not, this does not necessarily mean interest rates on duplex mortgages will necessarily follow suit.
When the Fed raises interest rates, it is actually raising the amount banks charge to lend each other money overnight so that they meet their minimum required reserves.
Banks typically pass this increased cost on by raising interest rates they charge consumers for “short term” loans.
So when Federal Reserve Chair Janet Yellen announces a rate hike, why does everybody panic?
Here are four ways an announced rate hike may impact your cash flow as a duplex investor:
Home Equity Loans and Lines of Credit – Many investors use these loans to aquire or improve rental property. Banks consider this short-term debt. Therefore, these loans are most often have variable interest rates, which the bank ties to the interest it is charged to borrow short-term money. Of course, the rate they charge consumers is always higher.
Credit Card Rate Hikes – If you use a credit card to purchase materials for your rental property and don’t pay the loan off every month, you will likely see a spike in the amount of interest you pay.
Stuff Costs More – Of course, if businesses have to pay banks more to borrow money, they have to increase revenue in order to remain profitable. They do this by raising prices. This may cause consumers to spend less and to some extent, change their ability to pay rent.
Jobs and Pay- If businesses are earning less, and people can afford less, the economy slows. This gradually leads to fewer people being hired, and those with jobs, are less likely to receive raises.
Of course, the Federal Reserve raises interest rates in order to slow inflation- in which prices rise rapidly.