Last Wednesday, the Federal Reserve cut interest rates for the first time in over a decade, as concerns about a slowing economy continued to rise. While it is important to understand how this historic change affects our nation, most people will only have one question on their minds: “What effect does this cut have on my personal financial future?” To understand that, we must first answer a few questions:
What IS the Fed Rate?
The fed rate — or federal funds rate — is the most important interest rate in the world. It is the rate that banks charge each other to lend Federal Reserve funds overnight. Banks are required to keep a certain amount of funds each night, ensuring that they have enough cash on hand to start each and every business day. That makes the fed funds rate our key tool toward controlling U.S. economic growth.
How am I affected personally?
Most credit cards have variable interest rates, and they’re tied to the prime rate, or the rate that banks charge to their preferred customers with good credit. That prime rate, however, is based off of the federal funds rate — meaning when the Fed lowers or raises its benchmark interest rate, the prime rate typically falls or rises with it. Check with your own bank to see if they are lowering their prime rate; if they are, their credit card rates are likely to follow.
The cut will also make it moderately less expensive for consumers to borrow money for a home equity line of credit, or pay back their current HELOC, as they also have variable rates. The changes on both HELOCs and credit card rates are likely to happen quickly, so be on the lookout for a change within your next few bill cycles.
But what about my mortgage rates?
Here is where we must advise caution on the part of the individual borrower. The truth is, mortgage rates track what is known as the 10-year Treasury rate, rather than the fed fund rate. And while these two rates are often affected by similar factors, they are not affected equally. So it really isn’t clear at this time whether the rate cut will affect mortgage rates.
So what should I do today?
The most important message we can pass along to our clients is that it is imperative that you speak with your mortgage professional before taking any action. Your personal financial history is like your fingerprint — it is completely unique. That means that no matter what happens on a national or global level, every person with a mortgage or looking to secure one will be affected differently. Today may be a great day for you to lock in a rate, or refinance your home. Yet for some, the best action may be no action at all.
Call Midwest Lending. Our job isn’t to help you secure as much financing as you can possibly afford. Our responsibility is to pair you with the right loan product for your personal financial situation. We’re here to ensure that your home will always be your most valuable asset, allowing you to better prepare for whatever the future may hold.