Near-zero federal funds rates help reduce interest rates for consumers across the board. ( iStock )
In March, the Federal Reserve slashed interest rates to near zero in response to the coronavirus pandemic and ensuing economic downturn. In September, the agency’s chair, Jerome Powell, announced that it would keep rates at that level through 2023 or potentially longer.
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The Fed rate cut, which was intended to help Americans struggling during the coronavirus pandemic, has been followed by record-low mortgage and private student loan interest rates, as well as lower interest rates on credit cards, personal loans, and other forms of credit.
To take advantage of these low rates and lower your monthly payments, consider a mortgage refinance. Credible can help you compare lenders and save on interest without impacting your credit score. You can complete the entire origination process — from comparing loan rates up to closing — all in one place.
In order to get back to maximum employment and maintain price stability, the Fed has also stated it plans to aim for inflation of 2% or potentially even higher. Inflation has run lower than this goal for many years, but inflation that’s too low can hinder the economy’s rebound.
Here’s how the Fed’s decisions can affect you.
What happens when the Fed cuts interest rates?
The Federal Reserve doesn’t have a direct impact on the interest rates lenders charge to everyday consumers. Rather, it can raise and lower the federal funds rate, which is the rate at which banks lend and borrow from each other to meet their overnight cash reserve requirements.
Because a lower federal funds rate reduces borrowing costs for banks, it also typically results in a lower prime rate, which is what lenders charge customers with the best credit profiles. The prime rate is used for several forms of credit, including credit cards, personal loans, home equity loans and lines of credit, auto loans, and more.
Mortgage rates may also be impacted by the prime rate, but not as much as shorter-term loans. So while 2020 has seen record-low mortgage interest rates, there’s no guarantee they’ll stay that way as long as the Fed keeps its federal funds rate low.
Based on the current mortgage and refinance rates, it may be a good time for you to refinance. To see how much you could save on your monthly mortgage payment today, crunch the numbers and compare loan rates and mortgage lenders using Credible's free online tool.
HOW YOU CAN BENEFIT FROM THE FED'S EMERGENCY RATE CUTS
If you have a loan or credit card with a fixed interest rate, you won’t see any changes to your current interest rate, at least not immediately. If you have a variable-rate credit card, which is more common, or other loans with a variable rate, your interest rate will update as often as the prime rate changes, making your debt less expensive.
As a result, interest rates may fall for credit cards. Explore and compare credit card offers using Credible — just remember to consider the requirements and annual fees associated with the card, along with the other card features.
HOW FICO'S NEW CREDIT SCORE CHANGES WILL AFFECT YOU How does the Fed’s new inflation approach affect borrowers?
Low inflation rates help keep interest rates on all forms of credit lower, especially long-term rates like you see on mortgage loans. As the Fed allows inflation to increase toward its goal and even past it, lenders will charge higher interest rates to compensate for the decreased purchasing power of the money they’ll receive as borrowers pay back their loans.
As a result, as inflation increases, you can expect both short- and long-term rates to rise. This includes mortgage loans, credit cards, personal loans, auto loans, home equity loans and lines of credit, and more. Increasing rates will especially impact mortgage borrowers because long-term rates aren’t helped much by low federal funds and prime rates.
HOW TO REFINANCE YOUR MORTGAGE Is now a good time to refinance your debt?
Between lower current interest rates and the threat of higher rates due to rising inflation, now is a good time to see if you can refinance your debt at a lower rate.
If you’re a homeowner, compare mortgage rates with Credible to see if you can save, but don’t forget about closing costs, which could neutralize any savings you gain from a lower monthly payment.
MORTGAGE REFINANCES ARE BOOMING — HERE'S WHY YOU SHOULD APPLY NOW
Refinancing your student loans through Credible may also be a good move, as you can compare rates from multiple lenders in one place without affecting your credit score. The same goes for credit cards and debt consolidation loans.
How to know when the time is right to refinance
Before you start shopping around, check your FICO credit score to see where you stand. If it’s improved since you first took out the loan or credit card, chances are you may have a good chance of qualifying for a lower rate. Even if your score hasn’t improved significantly, lower market rates may be enough.
And that goes for student loan refinance rates, consolidated loan rates, mortgage refinance rates, and just about any other form of credit you have.
If your credit score has decreased, though, you may have a hard time beating your current rate, even if market rates have gone down. Lenders will consider all aspects of your credit and financial situation to determine what to charge.
Using an online marketplace like Credible can allow you to see what rate offers are out there based on your credit profile without actually submitting an application. You also don’t have to undergo a hard credit check, which can impact your credit score. If you can find a lower interest rate through this process than what you’re paying now, it may be worth pursuing.
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That said, make sure to watch out for any costs associated with refinancing and run the numbers to ensure the savings outweigh the expenses.
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