How a Fed rate cut affects mortgages, loans, and credit cards

The Federal Reserve (Fed) on Wednesday made a highly anticipated 50 basis point cut in the federal funds rate, which is equivalent to half a percentage point.

The FOMC has announced a reduction in the target range from 5.25% to 4.75% to 5.0%.

The federal funds rate, which affects the interest rates charged by banks for credit cards, mortgages, and other financial products, as well as the annual percentage yields earned by savers on deposit accounts, is adjusted by the FOMC to set monetary policy.

The rate reduction is greater than the 25 base points some experts had predicted, and further reductions may occur.

Here are some financial moves to consider in the new economic landscape.

Mortgages

If you bought a house with a high mortgage rate and are considering refinancing, now could be the right time to do so, according to Joe Bogardus, a financial services executive with Barnum Financial Group. He suggests waiting for mortgage rates to drop by another half-percent or percent before refinancing, and to carefully consider the costs involved. Refinancing can save you money, but it also comes with fees and closing costs, so make sure the savings you get from lowering your rate is more than what you'll pay in lender fees and closing costs.

Our top choice for cash-out refinancing is Rocket Mortgage.

Rocket offers cash-out refinances at 100% equity to qualified borrowers, while most lenders cap it at 80% to 90%. Additionally, Rocket's average closing time for refinance mortgages is just 21 days, which is nearly half the national average.

Credit cards

While credit card providers may begin lowering annual percentage rates (APR) for cardholders, the reduction in rates is likely to be minimal and slow.

The average annual percentage rate (APR) for consumers paying interest on their credit cards has increased from 16.34% to over 22.76% since the Federal Reserve's last rate hike cycle from March 2022 to July 2023.

If you belong to this category, a 0% intro APR balance transfer card could allow you to pay off your balance without any additional interest.

New customers who transfer their balances to the Wells Fargo Reflect® Card within 120 days of account opening receive a 0% intro APR for 21 months. After that, the variable APR is 18.24%, 24.74%, or 29.99%.

The Reflect card charges a 5% balance transfer fee for each transfer, with a minimum of $5. It's crucial to pay off the card promptly to avoid a higher interest rate once the zero-interest period ends.

Student loans

As interest rates on private student loans decrease, it may be time to refinance them.

"Bogardus stated that our generation of borrowers benefited from competitive rates. However, those who took out private student loans recently may be facing high interest rates."

If you have a variable-rate loan, your rate may decrease automatically. However, refinancing and switching to a fixed-rate loan can guarantee that you secure the lower rate if it increases again. Additionally, if you already have a fixed-rate private student loan, refinancing can help you obtain a lower rate.

When refinancing, private lenders assess credit scores and income to set rates, meaning those with good credit will receive the most advantageous terms.

Citizens does not charge application, origination, or disbursement fees and offers a 0.50% rate discount on refinanced loans if you automate payments.

If you have federal student loans, Bogardus advises against refinancing through a private lender as it means losing government protections such as forbearance, deferment, and income-driven repayment plans.

If student loan forgiveness becomes widespread, you may not be eligible.

Car loans

In the second quarter of 2024, the average interest rate for a new car loan was 6.84%, while the rate for a used car was 12.01%. These rates were higher than the first quarter's rates of 6.73% and 11.91%, but lower than the 15-year highs they reached in 2023.

Although the Fed has started cutting auto loan rates, it's unlikely that they will drop significantly. However, this could be the perfect opportunity to purchase a new vehicle.

"As the supply increases and manufacturing picks up, prices are starting to decrease, according to Bogardus. Keep an eye out for deals, as historically, new models are released during September to November, and dealerships are looking to clear out their leftover inventory."

Some manufacturers have an oversupply of certain models and offer better discounts, which may help you find better financing with dealerships.

Savings

Although borrowers will benefit from the Fed's rate cuts, savers will suffer. High-yield savings accounts have been popular in recent years, with some providing returns over 5%.

Those yields will dwindle, Bogardus said, but not all at once.

If your goals are short-term or you're using the account for an emergency fund, you'll likely want to keep the HYSA.

He stated that rates for CDs will decrease in the upcoming 10 to 12 months, making it a suitable time to secure one.

Investments

According to Bogardus, bonds have an inverse relationship with interest rates, making a rate-easing cycle a favorable time to invest in them. However, he cautioned that purchasing bonds directly requires an understanding of individual credit risk, which may not be suitable for everyone. Instead, he recommended diversifying in a bond fund for those who are not comfortable with the individual credit risk involved.

Bond investing is a specialty of brokerage firms such as Charles Schwab and Fidelity, which offer both taxable and tax-free bond funds.

"When determining the proper investment strategy, especially if you're new to investing, it's recommended to speak with a licensed financial professional, as each individual has their own risk tolerance and goals."

Meet our experts

We interviewed Joseph Bogardus, a financial services executive with Barnum Financial Group, who is a designated Special Care Planner and college funding consultant, as well as a certified financial planner and an accredited investment fiduciary, for this story at CNBC Select.

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