On Tuesday, January 22, the Federal Reserve surprised us all with a slash to the benchmark Federal funds rate one week earlier than its originally scheduled meeting. With a reduction of 75 basis points, it was the single largest unscheduled rate cut in more than 20 years. What’s more, it was followed by another rate cut, this time of 50 basis points, on Wednesday, January 30th. These decisions came at a time when the markets were looking for some relief and when consumers were asking themselves, is now a good time to borrow?
The Fed’s decision to cut interest rates certainly does offer some good news for “prime” borrowers, meaning people with credit scores of 700 or above, the ability to document their income and assets, and who have a sizeable down payment if they’re looking to buy a home.
Consumers with lower credit scores will continue to have a harder time borrowing in today’s lending environment, which has tightened up on underwriting criteria. If you have a low credit score, don’t ignore it. There are actions you can take to improve it with time, and you can start today. First, get yourself a free copy of your credit report from each of the three credit reporting agencies at www.annualcreditreport.com (this service is not related to LendingTree.com) and make sure the information is accurate. Also, make sure you always pay your bills on time and keep your balances as low as possible if you can’t pay off the card entirely each month.
Below is a breakdown of how the Fed’s move should impact certain types of loans and credit tools:
Long-term mortgage rates are not directly tied to the Federal funds rate but they sometimes follow the same direction. For those of you who are interested in refinancing your mortgage (perhaps you have an ARM?) into a fixed-rate product, now is a great time to explore your options. Thirty-year rates dropped after the initial rate cut,(the week of January 22), and are now hovering around 5.50%. In addition to a great rate, you’ll have the peace of mind of not having to worry about your monthly mortgage payments rising.
Home Equity Lines of Credit
While interest rates on mortgage loans are not directly affected by Fed rate moves, most home equity lines of credit are. If you have a home equity line of credit with a variable rate, you’ll see a drop in your interest rate. For those of you in the market for either a HELOC or a home equity loan, you have some very good options right now. Some people choose to keep a line of credit open in the case of emergencies, which can be a very good idea if you’re a disciplined borrower. Just don’t forget, your home is your collateral, so if you can’t repay the loan, you can lose your house. But if you do fall into the “disciplined borrower” camp, this may be a good idea just in case something does happen and you are not financially prepared.
Most credit card interest rates will dip slightly based on the latest rate cuts. Each card’s interest rate is calculated differently based on how the card is indexed and your credit profile. If you’d like to see how your card(s) will be affected, reach out to your credit card company and start asking questions. While you’re on the phone, you may even be able to negotiate a lower rate. If you’re a customer in good standing, your chances for a break are decent and it’s certainly worth a try.
Many borrowers with strong credit will see lower interest rates on auto loans right away. Rates for a new car loan are around 7% today, and it’s likely they’ll continue to drop based on the latest news. Again, to earn the best rates, you have to make sure you’re an “attractive” borrower in the eyes of lenders. Also, don’t forget to shop around and compare offers in order get the best rate and terms.
For savers, the rate cut isn’t terrific news. Interest rates will continue to decline on most savings accounts, money market funds and certificates of deposit. But, don’t let this get you down. Competitive and attractive rates are still found in the emerging category of high yield savings accounts found online. Having adequate savings for both emergencies and long-term goals such as retirement and education is extremely important. Pay yourself first regardless of the rate environment.
Bottom line: if you’ve been sitting on the fence, now’s a great time to make a move. My advice for smart borrowing: do your research; compare today’s rates to what you’ve already got; and shop around to make sure you’re getting the best deal.
Chief Executive Officer