How Falling Interest Rates Could Impact Your Finances

How Falling Interest Rates Could Impact Your Finances

The Federal Reserve Board cut interest rates again by .25% on November 8th and many experts predict there may be even more cuts by the end of the year and throughout 2025. While rate cuts can mean good news regarding inflation (it signals that inflation is cooling), they can represent opportunities and challenges for consumers. This article explains why the Fed make rate cuts and how reducing interest rates may impact certain aspects of your finances including your mortgage, personal loans, credit cards, and savings accounts.

What is the Federal Reserve Board and How Do They Impact Interest Rates?

The Federal Reserve Board, often referred to as: the Fed, is the central bank of the United States. It was created by Congress in 1913 to promote a healthy U.S. economy. The board is comprised of seven members—appointed by the President of the United States—and the Presidents of 12 regional Federal Reserve Banks. The Fed performs many functions to bolster the economy but is most well-known for conducting U.S. monetary policy. This involves influencing interest rates and the availability of money and credit in the economy.

In general, the Fed raises rates when the economy is strong to combat inflation by making borrowing money more expensive and thereby discouraging spending. On the flip side, rates are decreased when the economy appears sluggish by making borrowing money less expensive and thereby encouraging spending. These changes in interest rates are then reflected (in varying degrees) in the rates that banks charge to borrow money for a home, personal loans, and credit cards as well as the rates they pay to consumers on savings accounts.

How Do Interest Rate Cuts Impact Your Mortgage?

Mortgage rates have been relatively high over the past three years, making the long-term cost to purchase a home more expensive for all and prohibitive for many. A lower interest rate can reduce the monthly payment on a mortgage, making homeownership possible for those who previously could not afford it.

It’s important to note that while the Fed’s rate cuts influence a bank’s interest rates, they do not set rates. There is not a one-to-one correlation between the recent rate cut (.5 percent), and how much all loan rates will drop. For example, if a mortgage loan rate was 6 percent before a Fed rate cut, it won’t automatically be reduced to 5.5 percent after the cut, but the rate could trend lower.

If you currently have a mortgage, you could benefit from reduced interest rates a few different ways. First, if you have an adjustable rate mortgage (ARM), rates generally decrease when the Fed issues a rate cut so your rate may automatically go lower. If you don’t have an ARM, you could lower your monthly payment by refinancing your mortgage to a lower rate. Keep in mind there could be costs associated with refinancing that could range from $4,000 to $5,000, or more, depending on your lender and loan. Like your original mortgage, refinancing can require certain closing costs including an appraisal fee, title search fee, application fee, attorney fees, etc. Your credit score can also impact the costs associated with your loan. The fees charged vary by bank or mortgage company, so consult your loan officer.

If you are wondering whether the timing is right to refinance your mortgage, start by calculating your breakeven point. This is the amount of time it takes to recoup the required expenses through the savings gained from a lower monthly payment.

Calculating your breakeven point is simple:

Step one: Talk to your loan officer and add up your refinancing closing costs.

Step two: Calculate your monthly payment using the lower interest rate and  estimate your monthly savings compared to your current payment.

Step three: Divide your total closing costs by your monthly savings. This number shows you the number of months it will take to breakeven on your refinance.

For example, if your closing costs add up to $5,000 and you estimate you will save $200 per month by refinancing to a lower rate, then your breakeven point is 25 months. If you plan to stay in your home or keep your mortgage at that rate for a little more than 2 years, then refinancing your home probably makes sense. If you plan to sell your home sooner than 25 months, it might not make sense.

How Do Interest Rate Cuts Impact Your Personal Loans?

Fed rate cuts will also likely result in lower interest rates charged on personal loans such as auto loans, lines of credit, and student loans. Lower rates will translate into lower monthly payments, making the purchase of goods and services using these financial tools more affordable. This is particularly true for new loans and existing loans with a variable rate. After a Fed rate cut, variable-rate loans may see the rate change within a month or so of the cut. Unfortunately, existing fixed-rate loans will not be impacted by rate cuts because the rates are fixed at the agreed upon rate when you took out the loan. However, you could consider refinancing your fix-rate loan with a new loan at a lower rate.

If you currently have a lot of debt, or debt with multiple creditors, a falling interest rate environment is a good opportunity to consider a debt consolidation loan. By consolidating all your debt into one loan with a lower interest rate, you could save on your monthly payments and possibly pay off your debt faster as long as you’re not taking on additional debt while paying off the loan.

How Do Interest Rate Cuts Impact Your Credit Cards?

Credit card interest rates have nearly doubled over the past 10 years with an average APR of nearly 23 percent in 2023. Fed rate cuts may somewhat reduce the interest rate on credit cards, but the impact is expected to be minimal. That’s because credit card issuers have more control over the rates they charge. While profit is one factor in determining credit cards rates, other important factors include what the competition is charging, regulatory decisions, and risk assessments.

While the best way to avoid paying high interest rates on credit cards is by paying off your balances on time and in full each month, a falling interest rate environment can be a good time to shop around various credit card issuers to find the best APR possible. By doing so, you may be able to transfer any existing higher-interest balance to new account with a lower rate to potentially save money on monthly payments and get out of debt faster.

How Do Falling Interest Rates Impact Your Savings Accounts?

While Fed rate cuts are generally good news for consumers when it comes to loans, they are not-so-good news when it comes to savings accounts. When interest rates begin to fall, the yields (interest) paid on savings account often fall, too. The higher the balance you are carrying in your savings accounts, the larger the impact rate cuts will have on the interest paid to you each month.

There are things you can do to help protect your interest income from falling rates. First, you can shop around for high-yield savings accounts as they usually offer higher interest rates than a traditional savings account. Keep in mind there may be higher balance requirements, a limited number of withdrawals each month, and other stipulations associated with the account in exchange for the higher yield. 

Another option is to move your money to a Certificate of Deposit (CD) account. They also typically have better rates than traditional accounts. However, you are required to keep your money in the CD for a set period and may not be able to make any withdrawals without a fee.

Key Takeaways

• Fed rate cuts can have a positive and negative impact on your finances.
• Lower rates can likely reduce the amount of interest you pay when taking out a mortgage. If you’re a current homeowner, you may also benefit from lower rates depending on the type of loan you have and/or if refinancing your mortgage to a lower rate makes financial sense.
• The cost of personal loans tends to go down after rate cuts, which makes purchasing goods and services with these financial tools more affordable. It’s also a great time to consider paying down existing debt by refinancing to a lower rate or by utilizing debt consolidation loans.
• There is usually minimal impact on credit card rates after Fed rate cuts, but it can be a good time to shop around with various credit card issuers to find the best APR possible.
• Fed cuts will likely impact the yield (interest) banks pay on their savings accounts. To help offset this impact, there are other savings account options available such as CDs or high-yield savings accounts that usually pay higher yields than traditional savings accounts.

If you have questions about how Fed rate cuts could impact your personal financial position, a Personal Banker from FNBO is happy to answer them. Visit or call a branch today!