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- The Federal Reserve cut interest rates in its September meeting.
- As rates fall, experts say it’s a good time to look at large, financed purchases and refinancing debts.
- It’s also an opportunity to revisit your plans for retirement.
With inflation starting to level off and the Fed cutting interest rates in its September 18 meeting, many experts believe rates have only just started dropping. This is both good news and bad news for average consumers and investors. After all, lower rates help consumers save when they borrow money, but they also translate to lower rates on savings accounts and money market accounts.
Still, consumers who want to “get ahead” in a financial sense should look for opportunities that lower interest rates create — especially if the interest they earn on savings products is about to drop.
1. Refinance your mortgage and other debts
Lower interest rates create an environment where refinancing some of your loans makes financial sense. This is true for home loans, personal loans, or even auto loans that were taken out when rates were higher than they will be once a rate cut takes place.
Mortgage rates started dropping in anticipation of expected rate cuts from the Fed, and Jennifer Beeston of Guaranteed Rate Mortgage, says it’s a great time to check in with a mortgage lender to see if you are in a position to get a lower rate and save money.
Even relatively small rate cuts can lead to significant savings when you refinance a home. For example, mortgage calculators show that a 30-year, fixed-rate mortgage for $300,000 at 6.5% requires a monthly payment of $1,896.20 (principal and interest), yet the same loan with a 6.0% rate has a monthly payment of $1,798.65. Savings become even more pronounced when rates drop by more than half a point over time.
Homeowners with considerable home equity could even use a refinance to tap into those funds for any number of reasons. “For homeowners who have high-interest credit cards, this could also be the time to look into a cash-out refinance to consolidate the debt and lower the monthly payment burden,” Beeston said.
Other debts can be refinanced for savings as well, including personal loans and auto loans. If you’re not ready to refinance yet (or you want to wait for further rate drops), you can take steps to prepare yourself financially as much as you can, which include checking your credit score and paying down any unsecured debts.
2. Consider new savings products and investments
Financial advisor Stephen Kates of RetireGuide says consumers should evaluate their risk tolerance before making any changes to where and how they save and invest.
However, it could make sense to consider different savings products than you’re using now, either before or after rates drop. For example, 5-year certificates of deposit may pay less than a 1-year CD right now, but that may not be true in the future if the Fed cuts interest rates several times over the coming months and years. Laddering CDs, bonds, or fixed annuities can also act as a middle ground for those who need to balance liquidity with returns, said Kates.
The advisor also says investors with a higher risk tolerance and long-term investment horizon can consider allocating more funds toward stocks and other equities.
“Certain sectors such as utilities, real estate, and consumer discretionary tend to perform especially well during rate-cutting cycles,” he said.
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3. Reconsider large, financed purchases
Financial advisor Cliff Ambrose of Apex Wealth says that lower interest rates can make some larger, financed purchases a much better deal. For example, borrowing money at lower rates can make it easier to purchase a home, finance a car, or start a business.
Lower interest rates can also help potential homebuyers buy a pricier home, since less of the mortgage payment they qualify for goes toward interest each month.
That said, Ambrose says consumers should be cautious about taking on more debt unless it aligns with their long-term financial goals. “Just because borrowing is cheaper doesn’t mean it’s the right time to make a big purchase, especially if it could strain your budget,” he said.
4. Assess your income
Financial advisor Lawrence D. Sprung of Mitlin Financial also recommends knowing if lower rates might impact your income, especially if you are living off savings in retirement.
“Investment-wise, it is time to evaluate your portfolio and see how lower rates will be affecting you,” he said. “Will your monthly income go down? If so, how will you replace that income with lower rates?”
If you’re worried lower rates on savings will cause you to deplete your retirement resources faster, Sprung says you should start by making sure your portfolio is positioned for the lower rate environment and aligned with your personal goals and risk profile.
“A plan should be put in place if there is a misalignment to work towards getting your portfolio aligned with the new rate environment,” he said.
If you’re unsure how to create a portfolio that yields the income you need to live in retirement, working with a qualified fee-only financial advisor may be your best option.
