The Federal Reserve decided to cut interest rates by a quarter point for the third time this year and it’s meant to bolster the economy.
Here’s a breakdown of how it works:
Most fixed-rate mortgages are based on long-term rates. A Fed rate cut mostly changes the short-term lending rate so don’t expect much impact on 30-year fixed loans from this decision. However, on a good note, mortgage rates have already been declining for the last several months, with the average 30-year fixed rate now just under 4%.
Generally speaking, when the Fed issues a rate cut, adjustable-rate mortgage (ARM) payments will decrease.
The Fed’s third consecutive rate cut will also make it slightly cheaper for consumers to borrow money from a home equity line of credit (HELOC) — a popular way for homeowners to pay for renovations and repairs. HELOCs could adjust within 60 days so borrowers will benefit from smaller monthly payments within a billing cycle or two.
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The prime rate, which is the rate banks extend to their most creditworthy customers, is typically 3 percentage points higher than the federal funds rate. With a rate cut, the prime rate lowers, too, and credit cards likely will follow suit. Most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate. As a result, cardholders could see a reduction in their annual percentage rate within a billing cycle or two.
For those planning on purchasing a new car, the Fed decision likely will not have any big material effect on what you pay. Since new cars are often financed by car manufacturers, this rate cut will lower their costs and could mean car shoppers will see more favorable rates to come.
While most student borrowers rely on federal student loans with fixed rates, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings. Private loans may be fixed or may have a variable rate tied to Libor, prime or T-bill rates, which means that when the Fed cuts rates, borrowers will likely pay less in interest, although how much less will vary by the terms of the loan.
Hope this is helpful information! Mortgage rates are low and that tends to bring out the buyers. So if you are thinking of selling, let’s talk because all these buyers need homes.