What’s going on with interest rates and why should I care?
Part One: The Fed Lowers Rates
It’s been an action-packed summer when it comes to interest rates. For the first time in ten years, the Federal Reserve lowered interest rates. What does this all mean and why should you care? I’ll discuss how lower rates impact YOUR finances.
The Fed Lowers Interest Rates
At the end of July, the Fed lowered interest rates for the first time in a decade. On September 17th and 18th, the Fed will meet again and are expected to lower rates once more by approximately 0.25%. When the Fed makes adjustments it's actually to the rate at which banks lend to each other. It is important to know that this will eventually trickle down to you. Banks use this rate as a guideline to set their own short-term rates for you, the consumer.
As a consumer, lower interest rates have positives and negatives. Knowing what they are will give you an advantage.
If you have a high-yield saving account it probably meant you saw your rate lowered this summer. Expect to see it happen again if the Fed lowers rates in mid-September. While it’s not fun to see your interest rate decline, there are still banks out there paying close to 2% on cash. If you have money in a savings account paying 0.05% it still makes a whole lot of sense to make a move.
If you are an investor, this also means bond yields are low. This can leave you in quite a predicament when searching for a decent rate of return on the safer part of your portfolio. Do not feel too bad because other economies actually have lower government bond yields than we do. Don’t be tempted to compromise quality for return by moving dollars into riskier high-paying, low-quality bonds. Remember investing is for the long term.
What if you’re on the other side of the transaction as a borrower? Well, lower interest rates can be a great thing. It’s cheaper to borrow when interest rates are low. You might want to consider taking advantage. Here are some ways you can:
Buying a house
Mortgage rates are down once again and have dropped to levels seen in late 2016. If you are considering purchasing a home, now could be the time to make your move. Of course, the decision to purchase a home should still make sense from an overall financial perspective. Make sure you’ve set enough aside for a down payment, moving costs, new furniture and upkeep costs.
Refinancing makes sense when you stay in the home long enough to recoup the closing costs. Generally, when you refinance you will want to decrease your interest rate by about 1% for it to make sense. You can run the numbers for yourself on sites like Mortgage Professor.
Using Home Equity to make updates (Home Equity Lines and Loans)
Lower borrowing costs mean those home projects are now more affordable. If there’s a project you’ve been putting off, like a new roof or HVAC system, you can borrow at a lower rate using the equity in your home. It’s important to know whether your rate will be fixed or variable.
You might be thinking, “Awesome, my student loan interest rates are going down!” Not so fast. If you have a current student loan your rate will not adjust. Rates are set each year in May for new borrowers. Current Federal loan rates will remain exactly where they are. However, if you are considering refinancing your student loan debt, now might be a great time to do so. Keep in mind there are other factors that should be considered when refinancing your student loan debt such as losing eligibility for loan forgiveness, deferment, and forbearance.
Just because interest rates are low, doesn’t mean it's the right time for you to borrow. It still has to make sense in the context of your overall financial situation. If the timing is right for you, take advantage! As with every situation, there are pros and cons and the financially savvy leverage both when it comes to their own financial situation. If your unsure, it's probably the right time to seek advice.
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Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 12 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. She also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.
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