How Does the Fed Holding Rates Steady Help You?

Blog posted On February 11, 2020

Last month, the Federal Open Market Committee (FOMC) or the Fed voted to leave the Federal benchmark interest rate unchanged.  That means they did not raise or lower interest rates.   After this announcement, average mortgage rates trended lower and most real estate professionals expect mortgage rates will stay low into 2020.  As a consumer, you may be wondering what exactly the Fed’s decision means for you, whether or not you have mortgage moves planned this year.

Credit Card Debt

Credit cards typically have variable interest rates, and much higher interest rates than other types of loans like personal loans or student loans.  When the Fed moves rates, credit card rates will move too.  For example, in July 2019, the average credit card rate was 17.85%, while today that figure stands closer to 17.35%.  American consumers with revolving credit card debt have an average balance of $7,000, costing about $1,100 annually just in interest payments. 

If you are currently paying down credit card debt, now could be a great time to consolidate your debt with a personal loan with a lower interest rate.   Bankrate reports the average interest rate on a personal loan is 11.30%, substantially lower than most credit card annual percentage rates (APR).  Like any type of loan, the interest rate on your personal loan will be influenced by your unique financial profile and factors like your credit score. 

Student and Auto Loans

Like credit card interest rates, the interest rates on student loans and vehicle loans will also trend lower if the Fed holds rates steady.  If you’re considering a vehicle purchase and need financing, this could be an opportunity to lock in a low rate.  Bankrate reports the average five-year new car loan rate is 4.56% and the average four-year preowned car loan rate is 5.33%.

Student loans are either federal or private.  Most students use federal loans, but each year about 1.4 million students also use private loans when necessary.  If you have private student loans, prioritize paying those off while rates are low, especially if they have a variable rate.  Then, you will pay less interest over time. 

Home Purchase

After the Fed’s January announcement, mortgage rates trended lower.  If you’ve been considering buying your first home or moving, the average 30-year fixed rate mortgage interest rate is over a percentage point lower than it was in January 2019.  Buying now could be an opportunity to lock in a lower rate.  

If you’re looking for a home, getting preapproved for mortgage financing helps you stand out to sellers and make a stronger offer.  Mortgage preapproval also gives you an idea of how much home you can afford so you can set a realistic budget.

Mortgage Refinance

Approximately 9 million homeowners could benefit from a mortgage refinance with today’s low interest rates.  Even if you bought your home within the past few years, a lower rate could help you lower your monthly mortgage payment and reduce the amount of mortgage interest you pay over time. 

There are other reasons to refinance besides locking in a lower rate.  Switching to a shorter loan term could give you a higher monthly payment, but it would reduce your payoff time and also the lifetime cost of mortgage interest.  Many homeowners also refinance to get cash out.  If you’ve built up at least 20% home equity in your home, a cash-out refinance could help you pay down higher interest debt, fund a home renovation or cover another expense.

 If you have any questions about today’s interest rates and how the impact your financial goals, let us know. 

Sources: Bankrate, CNBC, CNBC, Mortgage News Daily