When the Federal Reserve cut interest rates on Sept. 18, it did so by lowering its target for the federal funds rate — a rate that banks pay to each other, and not one that ordinary borrowers ever encounter.
But the Fed’s rate cut will trickle through to a wide range of rates that matter to consumers. Here are some considerations for borrowers in an environment where interest rates are falling:
Mortgage rates
When it comes to mortgage rates, there are two groups of people. First, there are those who bought a house prior to 2021 and likely have a very low mortgage rate currently. Even if they didn’t initially purchase their home at a low rate, homebuyers before 2021 would have been well-advised to refinance when mortgage rates were below 3%. For most of these homeowners, mortgage rates would have to be extraordinarily low before there’s an opportunity to refinance — and we’re nowhere close to that point.
Secondly, there’s a group of people who bought a home in the last three years, or who are looking to buy one soon, and a decline in mortgage rates is an important development. Rates have been dropping in the mortgage market for much of the past year as investors anticipated the Fed would eventually begin to cut interest rates.
As of Sept. 19, the average 30-year fixed-rate mortgage has dropped to about 6.1%, down from nearly 8% in late 2023, according to data from Freddie Mac. For those who purchased homes at relatively high mortgage rates, this is an excellent time to run the numbers on when it would be beneficial to refinance.
Prime lending rate
The prime lending rate is set by banks, but by long-standing practice it is set exactly 3 percentage points above the rate controlled by the Fed. When the Fed cut rates by 0.5 percentage points, the prime lending rate was immediately dropped by 0.5 percentage points as well.
The prime lending rate is widely used as the underlying rate for many credit cards, personal loans, or even home equity lines of credit. If you look at the fine print on these loans, you’ll often see that they pay a set premium (or sometimes a discount) to the prime lending rate. That means there’s a good chance your credit cards or HELOCs will soon adjust to a slightly lower interest rate.
Bridge loan rates
As interest rates come back down, those with short-term liquidity needs may find bridge loans to be an attractive option again. These loans, some of which are known as pledged asset lines (PALs) or margin loans, are often directly tied to the Fed’s target rates.
A common scenario for bridge loans is when someone wants to buy a new house before selling their old one. This loan uses their financial assets as collateral and provides temporary funds until the old house is sold. Investors with enough money can use bridge loans to make cash offers on houses, making the buying process smoother, and then get a mortgage after the sale is done.
Bridge loans can be risky if not used properly, but your wealth advisor can help you develop strategies for using this borrowing tool carefully.
Student loan rates
Student loans from the federal government have a fixed interest rate, currently 6.53% for typical undergraduate loans and 8.08% for typical graduate school loans. The federal rate is fixed for a year at a time, with the current rate applying through July 2025.
But as interest rates fall, more private lenders will be willing to refinance student loans at a discount to the current rate. While that can save money, borrowers should beware that refinancing from federal loans to private loans can take away eligibility for various federal loan forgiveness programs, such as for non-profit employees, or income-drive repayment plans that can cap the number of payments.
Auto loans
So far, the rate on auto loans has remained elevated, with the average APR for new vehicles hovering around 7% all year and the rate for used vehicles above 11%, according to Edmunds.com.
Many auto loans are tied to the prime lending rate, so these rates may begin to fall as well. Auto loans, of course, will remain heavily influenced by the type of vehicle and the borrower’s credit score.
Certificates of deposit, high-yield savings accounts and money-market mutual funds
The Fed’s effect on fixed-income investments like bonds is complicated (this is the subject of a recent piece written by our CIO, Don Calcagni). But for savings vehicles like certificates of deposit (CD), high-yield savings accounts or money-market mutual funds, the impact is more straightforward.
Interest rates for these savings vehicles closely track the rate of short-term bond yields and the Fed funds rate. When those short-term rates are dropping, the rates available to savers quickly fall as well. As CDs roll over, the new rates available simply won’t be as good.
What comes next
Though the Fed has begun lowering rates, it’s hard to know how fast or how far it will continue with rate cuts. When it started cutting interest rates in 2007 and in 2019 — the last two rate cutting cycles — it ultimately reduced its target rate all the way to nearly zero. From 2008 to 2022, the Fed’s target rate was nearly zero for about nine years, and its target was never above 2.5%.
But it’s worth remembering that this hasn’t been the historical norm. It’s too soon to say if rates will return to such low levels during this cycle. For now, many rates will still be relatively high compared to those that prevailed over the past decade.
A changing interest rate environment is an excellent time to talk to your wealth advisor, to make sure you’re prepared for the effects of lower rates on your portfolio, and to make sure you’re planning for any opportunities that lower rates may present for refinancing loans.
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