How Will Dropping Rates Impact Your Finances

The Fed cut rates repeatedly in 2024, and the effects continue to ripple across the economy.

How reductions in interest rates can affect your mortgage, credit card and financial future.

Key takeaways:

• The Fed cut rates significantly in 2024, which has a lasting impact on consumers and businesses.
• The Fed’s rate decisions impact the interest rate on a range of financial products. You may see rates change on mortgages, loans, lines of credit, credit cards and banking accounts when the interest rate changes.
• Rate changes also have the potential to impact the economy, which could impact your investment portfolio and even the job market.

There’s a reason interest rates keep popping up in headlines: Rates have been on a rollercoaster for the past few years. Between the rock-bottom rates in 2020, to hikes a few years later to moderate inflation, to a series of cuts in 2024 to stimulate the economy, you’ve probably experienced some sort of “financial whiplash” caused, in part, by fluctuating rates.

Understanding how rate cuts impact your finances allows you to anticipate what might happen if and when rates decrease again. Here are five things you may notice — and how to manage each one.

1. You may be able to access credit at a lower interest rate

When the interest rate goes down, banks generally lower the interest rates on their loans, lines of credit and mortgages. If your debt has a variable rate — such as a line of credit, variable -rate loan or variable-rate mortgage — you’ll likely see your monthly payments decrease, since you’re paying less interest month to month.

While fixed-rate mortgages and loans aren’t affected — you lock in a rate when you originate the loan — any new fixed rate loans will generally have a lower interest rate than they did before the rate cut.

• Pro tip: If you opened a fixed-rate mortgage or loan when rates were higher, consider reaching out to a mortgage specialist or financial advisor to discuss whether you’re able to refinance at a lower rate.

2. You might qualify for a bigger mortgage — and see housing prices go up

Whether you’re a current or an aspiring homeowner, rate cuts may impact your finances.

Lower interest rates generally make mortgages more affordable. That's because banks approve mortgages depending on how much borrowers can afford to pay each month, so lower interest costs mean applicants qualify for more. This may cause a ripple effect on housing prices, as buyers can bid higher and drive property values up.

However, it’s important to note that interest rates are only one of several factors that impact housing prices. Unemployment rates, cost of living, income and the overall strength of the economy play a major role in property values too. It’s important to think big picture, and make housing decisions that make financial sense for you, rather than trying to time the market and buy or sell strategically based on interest rates.

• Pro tip: If you’re a homeowner, increasing property values unlock additional equity in your home. That gives you more options to use your home equity to reach other financial goals.

3. You may earn less interest on your savings

Unfortunately, it’s not all great news. When interest rates go down, banks also decrease the amount of interest you’ll earn from your savings. You may see a dip in the interest rate on your savings account almost instantly, and find that interest rates on variable rate Certificates of Deposit (CDs) have decreased, too.

If you already own a fixed rate CD, you’ll still earn the same amount of interest — you locked in your rate when you purchased the CD. However, you may find that new fixed rate CDs pay out less interest than before the rate cut.

• Pro tip: If you’re looking to invest in a CD, it may be worth locking in your rate now. If the Fed announces additional rate cuts in the future, they will further reduce the yield from new CDs.

4. Your earning potential might increase

Credit doesn’t just become more affordable for consumers when rates go down, it also gets cheaper for businesses. As a result, rate cuts encourage businesses to invest in innovation, which can, in turn, create jobs — though, again, this can happen over a period of months or years, rather than overnight. If the labor market heats up, you may have more leverage to ask for that raise or seek out other opportunities in your industry to increase your income.

However, keep in mind that the Fed may lower interest rates when the economy weakens, in order to help prevent (or correct) a recession. So it’s important to get a big-picture view of how the economy is doing before making any important decision about your employment.

• Pro tip: If you’re a business owner, learn more about the impact of rate cuts on your business so you can adjust your strategy accordingly.

5. Your stock holdings may increase in value

Rate cuts can be good for your portfolio. Lower interest rates stimulate economic activity, which can increase revenue for businesses and boost share prices. Cheap credit also encourages companies to participate in stock buybacks — a practice where companies purchase outstanding shares in their own business — which further increases stock value.

However, not all investment vehicles are affected equally. And, like housing, several factors impact how companies perform — and their resulting share prices. A wealth management advisor can help you understand how rate cuts may impact your portfolio, as well as discuss your investment strategy to make sure it always aligns with your goals.

The bottom line

Reduced interest rates have the potential to impact several aspects of your financial health, from your mortgage to your investment accounts.

No matter how you plan to adjust to a rate cut, a Northwest Bank financial professional can help you understand your options and find the best next steps for you.