Common Financial Moves as Rates Start to Decline
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By: Michael Foster CFA, CFP®
In case you missed it, the Federal Reserve recently cut rates by 0.5% in their recent September meeting after an extended period of higher rates when compared to recent history. Despite a cut being generally expected in the weeks leading up, this made waves across financial news.
To some, it may have signaled a change in economic conditions. For others, it may have changed their investment outlooks or macroeconomic assumptions. Others may see the headlines and have no idea what any of this means or why it matters. Fear not!
I’m going to try to explain 3 common ways we see falling rates impacting regular people in their day-to-day.
Access to Capital
Lower rates can provide cheaper access to capital for those looking to take on debt for a mortgage, business, car, home renovation, and more. Holding all else equal, lower rates can help make things more affordable and lower monthly payments. Of course, in real life, “holding all else equal” isn’t exactly a realistic option.
For example, if increased demand for mortgages drives up home prices, affordability may not change by much even if rates are lower. Consider the total payments and how they affect your cashflow when taking out new debt, even if the rate is lower than you may have seen before.
Also, just because it might be cheaper to borrow doesn’t necessarily mean that you must borrow. Keep in mind your total debt levels and make sure you can afford and are comfortable with them. I personally like to break things down into monthly chunks and see how much of my monthly income is used towards my overall debt burden.
Refinancing
Often the first thing people think of when hearing about lower interest rates is the opportunity to refinance existing debt. If you opened a mortgage, auto loan, or many other types of debt in the last few years, you may have an opportunity to refinance to a lower rate. Be aware, these rates don’t all move in lockstep with the Fed, so be sure to check where your respective loan type’s rates are at.
You may also have variable debt, like a HELOC, that gets a lower rate automatically as rates decline. Be sure to check these accounts and the new rates applied.
For long-term and often large loans, like mortgages, even a small reduction in rates can make a huge difference in monthly cash flow or total loan payment amount. I like to calculate the breakeven point in terms of months of the refinanced loan with your current loan factoring in things like bank fees and any additional costs of doing so to make sure it’s right for your situation.
Personal Savings
Falling rates can be a bit of a double-edged sword for savers. While borrowing might be cheaper, yields on high-yield savings and money market accounts often decline as well.
This doesn’t mean that you should move your emergency/upcoming purchase funds out of these accounts. You just may not get the same level returns on this cash that you were before.
Rate changes serve as a good time to reevaluate the purpose of funds in these types of accounts. If you have excess funds that aren’t earmarked for emergencies or short-term needs, you may be better off getting those funds elsewhere rather than taking the lower rates.
All in all, lower rates can affect your finances in a variety of ways, including beyond these listed. Whether you’re looking to open a new loan, refinance an existing mortgage, or review savings vehicles, lower rates may impact your day-to-day finances. It’s important to navigate these types of changes as part of a broader financial plan to help you best hit your goals through time.
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.