How a Fed rate cut will affect your pocketbook
Borrowers have been taking it on the chin the past few years, with the Federal Reserve raising interest rates nine times since late 2015. Now, the Fed is aiming to soften that blow.
A quarter-percentage-point rate cut by the Fed on Wednesday and the possibility of three more cuts within the next 12 months likely would trim rates and monthly payments on credit cards, home equity lines, adjustable-rate mortgages and auto loans.
The goal of the expected cut is to make borrowing less costly for consumers and businesses, encouraging spending and bolstering the economy.
Don’t expect a windfall, at least in the short term, because Wednesday’s move merely reverses a fraction of the nine hikes over the past 31⁄2 years, says Greg McBride, chief financial analyst at Bankrate.com, which offers advice and tools to help people chose loans, credit
cards and other financial products.
Still, “On the margins, it will help people with debt,” says Steve Rick, chief economist of CUNA Mutual Group, an insurance and financial services company.
Credit cards
Credit card rates are generally tied to the prime rate, which is affected by the Fed’s benchmark rate. While the rate will eventually drop by a quarter percentage point, it might not happen as quickly as rates increased. That’s because card issuers often have language in their agreements that allows them to use the highest prime rate in effect during the preceding 60-day period, McBride says.
A quarter-point cut on a $5,000 credit card balance would lower the minimum payment by just $1 a month, a fraction of the $9 in increases already enacted.
Home equity lines
Most home equity lines of credit, or HELOCs, also track the prime rate. The rate decrease should show up within 30 to 60 days. But it would reverse just one of the Fed’s nine previous rate hikes since late 2015, so your rate is still higher than it had been a few years ago.
A quarter-point reduction on a $30,000 home equity line of credit would shave the monthly payment by $6.25, McBride says. Two such cuts would trim the bill by $12.50. By contrast, the nine rate increases since late 2015 have lifted the same payment by $56.
Adjustable-rate mortgages
Unlike credit cards and HELOCs, rates on adjustable-rate mortgages are modified annually. So the impact of the Fed’s rate cut, and any more on the horizon, may hit all at once at your next scheduled loan adjustment – which is what happened when rates were rising. A percentage-point cut in the Fed’s key short-term rate over 12 months likely would reduce adjustable-rate mortgages by a half percentage point because that rate is also affected by other factors. It would reduce the monthly payment on a $200,000 mortgage by $56, says Tendayi Kapfidze, chief economist of LendingTree.
Fixed-rate mortgages
The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly. Those rates more closely track inflation expectations and the long-term economic outlook, and have fallen substantially in recent months as concerns about the economy and low inflation have grown. The average rate has dropped to 3.75% from 4.5% a year ago, according to Freddie Mac.
Auto loans
When the Fed was raising rates, the higher borrowing costs didn’t always get passed to car buyers because manufacturers offered discounted financing to encourage car sales. Now that vehicle sales have slowed, makers are competing even more vigorously with each other. As a result, a Fed rate cut will likely be passed along to car buyers within weeks, Rick says. A quarter-point decrease on a five-year loan – now averaging 4.77%, according to Bankrate – would lower the monthly payment on a new $25,000 car by $3 a month, Rick says.
Student loans
Many private student loans come with variable interest rates that follow the prime rate. When the loan rate adjusts depends on what’s written in your loan terms. For instance, your monthly payment will decrease for those on a regular payback schedule. But if you’re on an income-repayment plan, your monthly payment won’t change, but a lower portion will go toward interest rather than principal.
Federal student loans have a fixed interest rate set by Congress and are not affected by the Fed’s move.