the The Fed’s surprise rate cut this week will likely further reduce borrowing costs on mortgages, home equity lines and credit cards.
The Federal Reserve on Tuesday cut its benchmark interest rate by half a percentage point, the first rate cut outside of a scheduled meeting since the 2008 global financial crisis.
The latest cut, to a range of 1% to 1.25%, was the fourth time the central bank has lowered borrowing costs since July.
“When the economy slows or looks set to slow, the Fed may choose to lower interest rates to encourage businesses to invest and hire more,” Howard Dvorkin, chairman of Debt.com, said in a note. “Reduced rates can encourage consumers to spend more freely, contributing to economic growth.”
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To be sure, Dvorkin wonders if the Fed’s rate cuts will make it harder for low-income, high-risk borrowers to get loans if banks decide to withdraw their loans. The rate cut also threatens to lower bank savings rates for seniors and others on fixed incomes.
Here’s a look at how a Fed cut could affect these commodities:
Impact of the Fed rate cut on mortgages
Potential home buyers and refinancers with mortgages could get even lower rates in the coming weeks. This is because the Fed’s short-term policy rate indirectly affects 30-year mortgages – the most common home loan – and other long-term rates.
Those rates have fallen to historic lows in recent months as the central bank slashed borrowing costs, giving homebuyers a reprieve.
The average rate for a 30-year fixed mortgage was 3.45% in the week to Feb. 27, down from 4.35% a year earlier, Freddie Mac said. The average rate for a 15-year mortgage fell to 2.95% from 3.77% a year earlier.
“This opens the door wide for refinancing, especially for borrowers who took out loans a year ago,” Greg McBride, chief financial analyst at Bankrate.com, said in a note. “Reducing your monthly mortgage payment by $150 creates valuable wiggle room in the household budget.”
Adjustable rate mortgage rates, however, change annually. So the impact of the Fed’s rate cut could be felt all at once during your next scheduled loan adjustment.
Home equity lines and rate cuts
Americans with home equity lines of credit will likely see their interest charges drop either with their next monthly bill or when the rate resets.
According to Black Knight, a mortgage data analytics firm, nearly 45 million mortgage homeowners have equity available through cash refinance or through home equity lines of credit, with an average net worth of $119,000 per month. owner. That’s about $8,400 more than a year ago.
Borrowers should be alert to changes in tax laws, experts say. Home equity lines of credit are no longer tax deductible, but interest on money used to improve a home is still tax deductible.
“Home equity lines of credit will benefit from the recent rate cut,” Dvorkin said. “However, home equity lines are no longer fully deductible under the new tax law, so you should be careful. It’s probably best to refinance the entire mortgage if you can find a lower rate than the one you are currently paying.
Credit card rates are usually tied to the prime rate, which is affected by the Fed’s benchmark rate. A half-point cut, for example, means that if a consumer’s current card APR is 18%, their rate will likely drop to 17.5%, according to chief analyst Matt Schulz. industry at CompareCards.
Since prime rates are a combination of rates and fees set by credit card issuers, the exact rate at which they drop depends on the card issuer and their policies.
“Most likely you’ll see a rate change within a billing cycle or two,” Schulz said in a note. “Better yet, pay off your balance in full so you don’t have to worry about your interest rates.”