How Will Dropping Rates Impact Your Finances

The Fed just announced the second consecutive rate cut this year. Here’s what that may mean for your mortgage, credit cards and beyond

How the Fed’s interest rate cut could affect your mortgage, credit card and financial future.

Key takeaways:

• The Federal Reserve just cut interest rates by 25 basis points, or 0.25%, following their 0.5% cut in September.
• The Fed’s decision impacts the interest rate on a range of financial products, so you may see rates change on mortgages, loans, lines of credit, credit cards and banking accounts.
• Rate changes also have the potential to impact the economy, which could impact your investment portfolio and even the job market.

If you were pleased at the Federal Reserve’s last rate cut, today’s announcement should bring even more relief.

The Fed has just announced its second consecutive rate cut this year — this time, slashing interest rates by 25 basis points, or 0.25%, after cutting rates by 0.5% in September. Overall, this means rates have declined by 0.75% in total this fall, with additional cuts expected in the new year. 

The Fed’s decisions around interest rates influence the interest rate on a number of financial products: Bank accounts, mortgages, loans and more. As a result, rate cuts have wide-ranging implications on your financial life, from the returns on your investment portfolio to the value of your home.

Here are five ways the interest rate cut could impact your finances, and how to set yourself up to reach your financial goals.

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

When the prime 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. With more buyers able to enter the market, real estate markets stand to heat up, and housing prices may increase accordingly. However, keep in mind that changes in the real estate market happen over a period of months or even years — so the most profound changes may be yet to come.

• 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, in turn, creates jobs — though, again, this can happen over a period of months or years, rather than overnight. As 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.

• 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 are usually also good for your portfolio. Lower interest rates stimulate economic activity, which often increases revenue for businesses and pushes up 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 prices.

However, not all investment vehicles are affected equally, and the returns you see depend on your holdings and strategy. 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 still aligns with your goals.

The bottom line

The Fed’s second rate cut signals a continued departure from the elevated interest rates of years past. And lower 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 the rate cut, a Northwest Bank financial professional can help you understand your options and find the best next steps for you.