Good news for borrowers: After years of rising interest rates, relief is finally in sight. The Federal Reserve cut interest rates by a half point at their meeting on September 18. While this will be a welcome change for those with loans, it marks a shift for savers who have been enjoying returns of 5% or more on high-yield savings accounts, money market accounts, and CDs. As we enter this new era of falling rates, here’s what you need to know about recent interest rate news, navigating the changing financial landscape and how it will impact your loans — and your savings.
Mortgage Rates: A Glimpse of Relief, But No Miracle
Mortgage rates have been on a downward trajectory since peaking at over 8% last October. They’re now hovering below 6.5%. This decline has already provided some relief to homebuyers, but any future changes to the mortgage rate will depend more on broader economic factors than on the Fed’s actions, according to Greg McBride, Chief Financial Analyst at Bankrate.com.
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“Further moves in mortgage rates won’t be in response to Fed interest rate cuts, but in anticipation of where interest rates are ultimately headed based on inflation and the health of the economy. But short of an economic calamity, we’re not going back to 3% mortgage rates,” McBride says.
Refinancing: Is Now The Time?
Yes, interest rates are lower — but are they low enough? McBride says that for homeowners with mortgages locked in at higher rates, it may be time to consider refinancing. “If you’re carrying a rate of 7%, 7.5% or 8%, being able to refinance now in the low 6’s is ‘bird in the hand,’” he says. “There are no guarantees on when and how much further mortgage rates will come down.”
But Matt Schulz, Chief Credit Analyst at LendingTree, says despite the recent interest rate news, he wouldn’t recommend moving too quickly on a refi. “I might consider waiting until rates fall a little more. I think there’s certainly reason to believe that rates are going to fall more, and I think that waiting at least a little bit longer probably makes a lot of sense,” he advises.
Bottom line: In the past, homeowners got used to refinancing more than once as rates fell. If you have the stomach for that and find yourself at a point where it makes sense economically to go forward, consider doing it — but also ask your lender what your options will be if rates fall more in the future. Would they offer you the opportunity to modify your loan with a streamlined transaction so that you don’t have to go through the entire process again?
Credit Cards: High Rates Are Here to Stay
Credit card holders hoping for immediate relief may need to temper their expectations. While credit card rates will eventually reflect the Fed’s cuts, the adjustment will take time — typically up to three statement cycles. As it stands, the average credit card rate remains near a record high of 24.92%, and that’s not likely to budge substantially anytime soon, despite the recent interest rate news.
“Credit card rates will come down over time, but not fast enough to bail you out of a tight situation,” warns McBride, who stressed that the reduction in rates would offer minimal savings.
Don’t believe us? Here’s some quick math from LendingTree on what a full point reduction in credit card APRs actually means for cardholders:
If you owe $5,000 on a credit card with a 24.92% rate and pay $250 each month, it will take you 27 months and $1,528 in interest to pay the balance off. Even if you dropped interest rates by a full point to 23.92%, you’d save just $85 in interest over 26 months, Schulz explains. Essentially, even with the the recent rate cut, these historically high APRs mean that no borrower should be expecting significant relief.
Certificates of Deposit (CDs): Lock in Rates While You Can
For those looking to explore CDs, the time to act is now. Both McBride and Schulz agree that CD yields, which have already begun to retreat from their peak earlier this year, are poised to decline further as interest rates fall.
“If you’ve been eyeing a CD, now is the time to lock it in,” advises McBride. Schulz adds, “The bad news is that if you’re jumping in now, you’ve probably already missed the peak, but rates aren’t going to fall off a cliff immediately after the Fed lowers rates, so you’ve still got a little bit of time to capture a [good] rate while they’re still relatively high.”
In other words, you can still secure favorable yields that will “easily beat inflation,” McBride says, especially if you’re able to commit your funds for a multi-year term.
Money Market Accounts and HYSAs: Sensitivity to Rate Changes
Money market accounts and high-yield savings accounts (HYSAs) have offered a haven for savers during the period of rising rates, but their sensitivity to interest rate cuts means that returns may start to dwindle quickly — especially if a series of rate cuts comes in quick succession.
“The top-yielding savings accounts, money market accounts, and money market funds will be very sensitive to interest rates coming down,” notes McBride. However, he says that the most competitive offers on money market accounts should continue to outpace inflation for the foreseeable future. In other words, they’re still worth it.
If you’ve been looking at a money market account or a HYSA, Schultz recommends acting sooner rather than later. “Moving funds from traditional savings accounts to a money market account or a HYSA still makes sense,” he says, since rates on these accounts are expected to remain relatively high until further rate cuts by the Fed. (The Fed may cut rates again at all three of its remaining meetings this year.)
Auto Loans: Minimal Impact for Car Buyers
For those in the market for a new car, the expected rate cuts won’t offer substantial relief in the short term. Auto loan rates will likely only see modest reductions, meaning that the high monthly payments many buyers face won’t change significantly.
“Auto loan rates will move consistently lower as the Federal Reserve cuts interest rates repeatedly, but it won’t singlehandedly cure car-buyers’ affordability woes,” McBride says.
With average monthly car payments now reaching $735 according to LendingTree, a half-point reduction in interest rates would only save about $8 per month on a $35,000 loan.
Schulz advises car buyers to shop around and secure pre-approval from banks or credit unions, as these institutions often offer better rates than dealerships. “Interest rates are still really high, so it’s not like you’re going to save a lot of money there,” he warns, emphasizing the importance of comparing offers before making a purchase.
Home Equity Loans and Lines of Credit: A Slow Road to Relief
Home equity loans and lines of credit (HELOCs) became increasingly expensive as interest rates climbed, and while these rates will likely fall alongside the Fed cuts, the process will be gradual.
“HELOC rates will mimic the reduction in benchmark interest rates, but it will take a lot of time and a lot of interest rate cuts to ease the interest cost burden on borrowers,” McBride says. This means that homeowners should remain vigilant about paying down their debt, and be on the lookout for refinancing opportunities as rates decline.
Student Loans: A Better Outlook for Borrowers
For borrowers with variable-rate private student loans, recent interest rate news on anticipated rate cuts offer a glimmer of hope. As the Federal Reserve reduces interest rates, these loans should see lower rates through the end of 2024 and into 2025.
“Variable-rate private student loans will trend lower as the Federal Reserve cuts interest rates through the balance of 2024 and much or all of 2025,” McBride says. However, rates for federal student loans, determined annually, won’t be set until later in the year — though they are expected to be lower than current levels.
The Bottom Line: You’re In The Driver’s Seat
As interest rates come down, consumers should recognize that while rate cuts will have an impact, the short term changes will be subtle Whether it’s shopping around for better rates, locking in high yields while you can, or strategically managing your debt, being proactive about your money will have a far greater effect on your financial health than simply waiting for the Fed to act.
“It’s really important that people understand that they can have a lot more impact on interest rates by taking matters into their own hands, rather than waiting for the Fed to ride in like the cavalry to save them,” Schulz says.
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