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HOW DOES THE FED’S INTEREST RATE CUT AFFECT YOU?

HOW DOES THE FED’S INTEREST RATE CUT AFFECT YOU?

HOW DOES THE FED’S INTEREST RATE CUT AFFECT YOU?

After three interest rate cuts in 2019, the conventional wisdom was that the economy was stable and strong, and the interest rate might remain at 1.75 percent for some time to come. However, concerns that the spread of the Corona virus might negatively affect not just the U.S. economy, but the financial standing of all developed countries, spurred the Fed to make another one-half point cut. This time, presumably, the reduction is intended to bolster the economy and encourage spending. Now that the interest rate stands at 1.25 percent, here are a few ways it could affect you:

Mortgage Rates: If you have a fixed mortgage rate, your payments will remain the same. But if you have a variable interest rate, it is possible you may see a slight decrease in your monthly payment. Will the Fed’s recent move encourage new home loans? Will there be a rush to refinance existing loans? That remains to be seen.

Credit cards: If you pay your cards in full monthly, the interest rate cut will not affect you. But if you do not pay in full, this is probably a great time to try to pay your cards off, or at least pay them down. If your rate goes from 18 percent to 17.5 percent, that may not sound like much, but over time it is. This may also be the time to make any major purchase you had been considering.

Auto Loans: The rate cut affect on auto loans may be minimal. For example, if you buy a car that costs $25,000, and the interest rate cut is .5, on a five-year loan you may only have about a $6 reduction in your monthly payment. However, because the rate is now as low as it is, car dealers and manufacturers have more flexibility in making deals with you, so you may want to take full advantage of that.

Savings Account: Last year’s rate cuts happened as banks were paying as much as two percent on regular savings accounts. In the foreseeable future, savings accounts may take a hit. But if your savings account is not used as an emergency fund, it makes more sense to buy three or five-year CDs, and lock in the higher rate. Usually CD rates do not fall right away after a rate cut, so now is the time to make your CD decision before the rates begin to slide.  

Long-term care insurance: Older consumers who take out long-term care insurance might see premium rate hikes now that the interest rate is as low as it is. This is because of part of the cost of long-term care insurance is covered through yields on investments, but low interest rates would diminish those returns. Low interest rates work to the disadvantage of those who pay long-term care insurance premiums.

Home equity loans: Experts agree that home equity loans have become a double edged sword with the recent interest rate cuts. On the plus side, the rates on the loans will obviously be lower. However, home equity lines of credit are no longer tax-deductible, but interest on money used for improvements to a home are still tax deductible.

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