The Fed’s surprise rate cut this week will likely trim borrowing costs further on mortgages, home equity lines and credit cards.
The Federal Reserve lowered its benchmark interest rate Tuesday by half a percentage point, the first rate cut outside of a scheduled meeting since the global financial crisis in 2008.
The latest reduction, 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 down or looks like it could, the Fed may choose to lower interest rates to incentivize businesses to invest and hire more,” Howard Dvorkin, chairman at Debt.com, said in a note. “Reduced rates may encourage consumers to spend more freely, helping economic growth.”
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To be sure, Dvorkin questions whether the Fed’s rate cuts will make it harder for lower-income, higher-risk borrowers to obtain loans if banks decide to pull back lending. Falling rates also threaten to nudge down bank savings rates for seniors and others on fixed incomes.
Here’s a look at how a Fed cut could affect these products:
Fed rate-cut impact on mortgages
Potential homebuyers and refinancers with mortgages could score even lower rates in the coming weeks. That’s because the Fed’s key short-term rate affects 30-year mortgages – the most common home loan – and other long-term rates indirectly.
Those rates have fallen to historic lows in recent months as the central bank has lowered borrowing costs, giving home buyers a reprieve.
The average rate on a 30-year fixed mortgage was 3.45% during the week through Feb. 27, down from 4.35% a year earlier, Freddie Mac said. The average rate on a 15-year mortgage fell to 2.95% from 3.77% a year earlier.
“This blows the refinancing door wide open, particularly for borrowers that had taken loans a year ago,” Greg McBride, chief financial analyst at Bankrate.com, said in a note. “Knocking $150 off your monthly mortgage payment creates valuable breathing room in the household budget.”
Rates on adjustable-rate mortgages, however, are modified annually. So the impact of the Fed's rate cut may hit all at once at your next scheduled loan adjustment.
Home equity lines and rate cuts
Americans who have home equity lines of credit will likely see their interest costs fall either with their next monthly bill or when the rate resets.
Nearly 45 million homeowners with mortgages have equity available to tap via cash-out refinance or through home equity lines of credit, with an average $119,000 in equity per homeowner, according to Black Knight, a mortgage data analytics company. That’s up about $8,400 from a year ago.
Borrowers should be mindful of changes to the tax law, experts say. Home equity lines of credit are no longer tax-deductible, but interest on money used for improvements to a home are still tax deductible.
“Home equity lines of credit will benefit from the recent decline in rates,” Dvorkin says. “However, home equity lines are no longer totally deductible under the new tax law, so you have to be careful. It’s probably better to refinance the whole mortgage if you can find a rate that’s lower than what you’re currently paying.”
Credit cards
Credit card rates are typically tied to the prime rate, which is affected by the Fed's benchmark rate. A half-point reduction, for instance, means that if a consumer’s current card APR is 18%, their rate will likely decrease to 17.5%, according to Matt Schulz, chief industry analyst at CompareCards.
Since prime rates are a combination of rates and fees determined by credit card issuers, exactly how fast they fall depends on a card issuer and its policies.
“Most likely, you’ll see a rate change within one or two billing cycles,” Schulz said in a note. “Better yet, pay your balance in full so that you don’t have to worry about your interest rates.”
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Here's how the Fed's surprise interest-rate cut affects mortgages, credit cards and home equity lines - USA TODAY
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