Four Ways to Take Advantage of the Fed’s Interest Rate Cut
Last week, the Federal Reserve announced it would cut its benchmark interest rate by 50 basis points , the first cut in borrowing costs since the pandemic began in March 2020. That federal funds rate is now in the 4.75% to 5% range, providing some breathing room. on credit cards and rates on consumer loans in all directions. While a half-percent rate cut (that is, 50 basis points) would certainly reduce borrowing costs, it would not bring radical relief. And while some of the effects of rate cuts will be almost immediate (like credit card interest rates), others will take time to materialize (like more people refinancing their mortgages).
No matter how long the break is, there are a few financial moves you could take to make the most of these lower interest rates.
Refinance your mortgage
Even before these rate cuts, mortgage rates fell to their lowest point since May 2023, averaging 6.59%, according to a Bankrate survey . Of course, lower rates are one thing; The reality of refinancing is different .
Check your current rate and compare it with the new available rates. Even a difference of 0.5% to 1% can result in significant savings over the life of your loan. Be sure to consider your break-even point so you can see how long it will take for the savings from the lower interest rate to offset the cost of refinancing.
While refinancing may not make sense for everyone, it may be especially beneficial for homeowners who took out mortgages during the recent rate increase. Use Bankrate’s mortgage refinance calculator to see if refinancing makes sense.
Deal with your debts
While it may take some time for mortgage rates to adjust, other forms of debt will see more immediate effects:
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Personal loans : If you have a high-interest personal loan, consider refinancing options. You may be able to secure a lower rate now.
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Auto loans : If you financed your car when rates were higher, explore refinancing options. Even a small reduction in your interest rate can lead to significant savings over the life of your loan.
Reevaluate your savings strategy
Unfortunately for savers, the interest you earn on savings accounts could drop, potentially immediately. Now might be a good time to look at other savings products you’re using now, before or after the rate drop:
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High-yield savings accounts : These accounts often offer better rates than traditional savings accounts. Even if interest rates on your savings account are low, a high-yield savings account is a smart way to earn some return on funds you know you’ll have access to over the next one to five years. Here’s our guide to finding the best vintages .
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Certificate of Deposit (CD) ladders : CDs are time-based and are typically offered for terms ranging from three months to five years; longer terms imply higher interest rates. Consider creating a CD ladder to take advantage of potentially higher long-term rates while maintaining some liquidity. When you build a CD ladder, the CDs will have staggered maturities, giving you better access to your money without paying early withdrawal penalties.
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Money Market Accounts : A money market account (MMA) is a way to earn higher interest rates than a regular savings account. They may offer better rates than traditional savings accounts while still providing more flexibility than CDs, but anyone who has become accustomed to yields of 5% or more on cash in recent years could benefit from reallocating their money if it is not needed in the near future.
Rebalance your investment portfolio
This rate cut is a great reminder of why diversification is so important . Make sure your portfolio is designed for the lower interest rate environment and suits your personal goals and risk profile.
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Consider increasing your investment in growth stocks . According to US News , growth stocks are expected to continue to outperform value stocks as the Fed cuts interest rates. Lower interest rates could benefit growth-oriented companies that rely on borrowing to finance expansion. Here are the best performing growth stocks this month .
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Stick to higher quality bonds : Bond prices may jump as investors want bonds issued at higher interest rates before the Fed cuts rates. However, for now, the new bonds will offer lower yields.
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Take a look at real estate investing : Lower interest rates may stimulate the real estate market. As mortgage rates decline, the housing market could see increased activity as more people are able to afford a home or refinance their existing mortgages. Here’s our guide to investing in real estate without breaking the bank .
Remember: While rate cuts can open up new opportunities, it’s more important to consider your overall financial situation and long-term goals than to make any significant changes in response to rate cuts. Always consult a financial advisor for personalized advice tailored to your specific circumstances.