And even on existing loans, there’s a glimmer of hope that consumers may eventually save money by refinancing their mortgages and auto loans, so long as the Federal Reserve continues to cut its benchmark interest rate in the months to come, as many economists and the Fed itself predict it will do.
For those planning to purchase a home or motor vehicle, you can expect slightly lower interest rates on mortgages and auto loans, both of which have been trending downward in anticipation of the Fed’s rate cut.
This week’s cut in the Federal Reserve’s key interest rate makes it a good time for consumers to think about how to take advantage of the first tick down in interest rates since 2020.
The cut in the Fed’s benchmark rate will also likely drive down interest rates on credit card debt, which could eventually save consumers hundreds of dollars a month.
Prior to this week’s cut of a half a percentage point, the Fed’s benchmark rate stood at a range of 5.25 percent to 5.5 percent. Financial analysts say it could go below 3.5 percent by May. That would be a relief for consumers who have recently faced the highest interest rates in more than two decades.
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Here’s what consumers need to know:
Does the Fed’s cut in its interest rate mean an automatic interest cut on my consumer loans?
No, your loans are legally enforceable contracts between you and your lender. Nothing the Federal Reserve does can change that. But a cut in the Fed’s rate means money is cheaper to borrow — for lenders as well as borrowers. Lenders competing for your business may offer lower interest rates because it’s costing them less to borrow the money they loan you. It’s up to you to take advantage of these market forces by shopping for lower rates.
How does it affect mortgage rates?
Mortgage rates are not tied directly to the Fed’s rate. But they are significantly influenced by it, along with such market factors like inflation, bond yields, and risk. Rates hit record lows of under 3 percent during the pandemic, then shot up to more than 8 percent in late 2023 as the Fed responded to rapid inflation by jacking up its interest rate. Today, mortgage rates are in the 6.5 percent to 7.3 range. Bankrate, a personal finance company that operates a popular website, forecasts further decline in mortgage interest rates “though the timing remains uncertain.”
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Home mortgage rates are posted outside a real estate office after the Federal Reserve interest rates announcement on Sept. 18 in Los Angeles, Calif. Mario Tama/Getty
Should I wait for mortgage rates to drop before buying a home?
Probably not. The consensus among many financial analysts is that mortgage rates aren’t likely to drop below 5 percent any time soon. Meanwhile, home prices continue to appreciate rapidly. In fact, falling mortgage interest rates could push home prices even higher. If you find a home that you can afford at current mortgage rates it might be best to grab it. Of course, it’s important to shop around for the best mortgage interest rate. Besides banks, check rates offered by mortgage brokers and credit unions and make sure you are making apple-to-apple comparisons by factoring in fees and other expenses that get tacked on to some mortgages.
What about home equity lines of credit?
Borrowing money against the equity in your home may make sense to finance home improvements, consolidate debt, or make other large purchases. Due to the recent appreciation in home values many homeowners have considerable equity in their homes. And taking a home equity loan or line of credit for needed cash is a lot cheaper than a personal loan or piling up debt on your credit card. Interest rates on home equity loans tend to follow the Fed rate more closely than mortgage rates, so you can expect a gradual step down.
Is it too early to think about refinancing my mortgage?
Probably, but it’s worth tracking mortgage interest rates in the months to come to see if they go significantly below your current rate. Many financial analysts say refinancing is a good idea if you can reduce your interest rate by at least 2 percent because you must cover the additional fees that come with refinancing. Others say a 1 percent savings is incentive enough to consider refinancing.
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How does refinancing work?
It basically means you pay off your existing mortgage at its existing interest rate with a new mortgage with a lower rate. You may refinance with a new lender or your current one. Remember, lenders are now borrowing money at a cheaper rate and therefore can afford to compete for market share by offering lower rates. A refi could save you hundreds of dollars monthly.
What should I know about auto loans?
The average rate on a new car loan last month was 7.1 percent, down from 7.4 a year ago but up from 5.7 in 2022, according to Edmunds, an auto shopping website. Auto loans rates are not tied directly to the Fed rate, but are certainly influenced by it. At some point you could consider refinancing your auto loan, but first check whether it’s subject to a prepayment penalty for paying it off early.
Ford signage at a dealership in Richmond, Calif., on June 21. David Paul Morris/Bloomberg
What about student loans?
Current federal loans are 6.53 percent for undergraduates, 8.03 percent for unsubsidized graduate student loans, and 9.08 for PLUS loans available to parents and graduate students. Federal student loans can be refinanced with private lenders whose interest rates are influenced by the Fed rate. But there’s a big caveat before going private. Private student loans do not offer the same benefits as federal student loans, such as deferment and forbearance, income-driven repayment plans, and forgiveness programs for certain government and not-for-profit organization jobs.
What’s the impact of the Fed’s rate cut on credit card debt?
About half of American credit cardholders carry a monthly balance. The average carry-over balance is close to $7,000 and the average interest rate on those balances is almost 23 percent. The Fed’s rate cut should cause the banks that issue credit cards to begin dropping their rates, but probably not as fast as you might expect. Keep in mind that a 1 percentage point drop in your credit card interest rate would push the monthly interest cost on $7,000 of debt from $134 to $128, not much you may think. But what you should focus on is that credit card debt is by far the most expensive form of consumer borrowing and should be avoided if possible. Carrying a balance is like subsidizing your bank.
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Can I refinance credit card debt?
Yes, one way to do it is by taking a home equity loan. But a more common method is to make a balance transfer to another credit card company. Once again it pays to shop around: You can tell your credit card company you are prepared to make a balance transfer unless it lowers your rate. Some credit card companies offer zero percent interest on balance transfers. But remember: low or zero interest on balance transfers usually last for a limited time before reverting back to higher rates. And balance transfers come with fees, typically 4 percent of the amount transferred. Your goal should be to pay off the balance during the low or zero interest period.
How do I shop for a lowest credit card interest rate?
You can find plenty of websites offering comparisons of credit cards by typing “shopping for a low interest credit card” into your browser.
Got a problem? Send your consumer issue to sean.murphy@globe.com. Follow him @spmurphyboston.
What the Fed rate cut means for mortgages, auto loans, and credit card debt
