When the interest rate decreases, it means borrowing cost decreases, which is good news for those who need loans. The Federal Reserve cut interest rates again in July, and experts predict that there will be more rate cuts in the next two years. This means that mortgages and credit card rates will decrease. However, the actual impact of the rate cut depends on the speed and magnitude of the cut. A rapid and significant rate cut may have a more noticeable impact on borrowers.
For homeowners with mortgages, a rate cut is crucial. With large loan amounts, even a small rate reduction can have a significant impact on monthly payments. The 30-year fixed-rate mortgage averaged 6.73% in August, the lowest level since February, according to Freddie Mac. Historically, every rate-cut cycle has seen mortgage rates decrease by at least 1.25 percentage points, often exceeding 2 to 3 percentage points.
Credit card debt is another type of high-cost loan. While a rate cut may not significantly reduce the already record-high average 20.7% interest rate, individuals with credit card debt can still benefit from applying for a zero-rate balance transfer card, which offers at least 12 to 18 months of interest-free period to pay off their debt.
For car buyers, a rate cut may not have a significant impact. According to Greg McBride, chief financial analyst at Bankrate, a 1% rate reduction would translate to a monthly savings of $4 or an annual savings of $48 on a $35,000 car loan.
Savers can also benefit from a rate cut. Many savings accounts still offer rates between 4.5% to 5.2%, with some longer-term CDs (certificates of deposit) offering rates between 4.85% to 5%. For those who want to lock in high rates, selecting a non-callable CD is recommended. Some bonds, particularly those exempt from state and local taxes, can also be a viable option for those living in high-tax areas.