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Federal Reserve rate cut: how it will affect borrowers

Posted on by L. Dreeye
Federal Reserve rate cut: how it will affect borrowers

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When William Doolittle and his boyfriend applied for a mortgage in early September, the couple decided to defer taking out a loan at a rate of 5.125%. The Federal Reserve was expected to cut its key interest rate later that month, and Doolittle and his partner hoped the cut would lead to even lower mortgage rates.

The wait cost them money.

Mortgage rates are rising after a steady decline in August and the first half of September, with the average 30-year mortgage at about 6.84%, up from 6.08% in the week ended Sept. 26, according to Freddie Mac. Doolittle said he locked in the mortgage rate for a home in Ithaca, New York, before rates jumped too high, but his attempt to time the market means he’ll pay about $300 a year for his home more than his original offer.

Despite the higher bid, Doolittle said he and his partner are still thrilled to have found a turnkey home that has everything they need: a garage for the winter, plenty of space in the backyard and spare bedrooms for guests or future children .

“When you’re a first-time home buyer, you feel like you’re in the woods,” Doolittle, 31, said. Mortgage rates “are really hard to predict and we knew we were playing a little bit… (but) we’re still happy with the outcome.”

A NerdWallet survey conducted by The Harris Poll in July found that 61% of Americans planned to take some kind of financial action after the Fed cut rates. But while key interest rates can impact different loans, consumers are realizing that timing big purchases during a period of lower rates isn’t always the best move.

“I would caution consumers against placing too much weight on promises of lower rates or reaching a certain level by a certain point in the next year,” said Elizabeth Renter, senior economist at NerdWallet. For certain purchases, “you’re taking a big risk while you wait.”

Why choosing a mortgage loan is difficult

The central bank has cut key interest rates twice this year, cutting them by 75 basis points to a range of 4.5%-4.75%. Even more cuts are predicted for 2025.

The base rate has a ripple effect throughout the economy. As the Fed rate has risen in the wake of the COVID-19 pandemic, so have mortgage rates, auto loans, credit card rates and student loan rates.

A reduction in the base rate should also soften these rates. But while financial institutions can quickly lower savings account rates after a rate cut, loans tend to fall at a slower pace.

And it’s not just the Fed that influences consumer lending rates, making them difficult to predict.

For example, mortgage rates typically align with the 10-year Treasury yield, the rate the federal government pays investors to borrow money from them for a decade. Those yields are rising amid concerns that President-elect Donald Trump’s proposed fiscal policy will be inflationary, which could mean higher mortgage rates for longer.

Mortgage rates and the Fed’s benchmark rate “are still linked, but it may not be so much what the Fed does today as what the markets think it’s going to do in a year, five years or even 10 years from now.” “, he said. Daryl Fairweather is chief economist at real estate brokerage Redfin.

Mortgage rates are also influenced by factors such as location, down payment, home price and credit history.

Despite all these variables, the data shows that some consumers tried to time large purchases with rate cuts. Data tracked by Redfin showed that while mortgage rates fell in August, demand did not pick up until the Fed’s rate cut announcement made headlines in September. After the elections, demand increased again.

When to fix mortgage rates: How will mortgage rates change after the election?

People are “very responsive” to major news events such as Fed rate cuts and the election, but trying to time a home purchase to coincide with rate cuts may be a “fool’s errand,” Fairweather said.

“Sometimes you get lucky and can lock in your bid on a day when rates are low,” she said. “But trying to time it over the long term is really difficult, especially now because we don’t really expect rates to fall.”

A NerdWallet survey found that 15% of Americans planned to buy a home after the rate cut.

Collin Lambrecht, 30, of Minneapolis, and his wife began house hunting in April, looking for more space for their dog and space to raise their family. He said competition was low until September, when more buyers flooded the market following news of the Fed cutting interest rates.

After four rejected offers, Lambrecht and his wife closed on their home and locked in a mortgage at 6.85% in November — up from about 6% just three weeks earlier.

“It was very disappointing to see mortgage rates go down in about two or three weeks,” Lambrecht said. “If this house had been on the market two weeks earlier, we could have paid several hundred dollars less a month.”

Christopher Suranna, a Washington, D.C., Realtor and president of the Greater Metropolitan Association of Realtors, said he has noticed buyers who are “definitely concerned about interest rates” in their area.

If a buyer can afford a higher rate mortgage and finds a home that meets their standards, they offer to complete the purchase and consider refinancing at a later date. But NerdWallet’s Tenant warns that refinancing opportunities are not guaranteed.

If rates go down next year, “you can refinance. But what if this is not the case? Or what if you do, but your credit has changed and you can’t qualify for a lower rate?” – said the tenant. “If you took out a higher interest rate mortgage and are already in trouble, you may find yourself in a precarious situation.”

Will car loan rates go down soon?

Erin Keating, executive analyst at Cox Automotive, said the Fed’s rate cut is one reason demand has risen in recent weeks. According to a recent report from Cox Automotive, new vehicle sales were up 13% in October compared to last year.

Keating said auto loans tend to track the yield on the five-year Treasury bill, and rate cuts are just starting to trickle down to auto loans. In early November, rates were down 30 basis points year-over-year for new vehicles and 55 basis points for used vehicles, according to Cox Automotive.

According to a NerdWallet survey, 23 percent of Americans said they plan to buy a car after the rate cut. But Keating cautioned against trying to time car purchases to coincide with rate cuts, noting that too many other factors are influencing costs.

“We think auto interest rates are coming down, but I’m not sure it’s significant enough for people to see the Fed cutting rates,” Keating said.

NerdWallet’s Renter said the longer consumers wait, the more time they allow the Fed’s rate cuts to ripple through the economy. But for now, the impact “will be very, very small.”

“Instead of waiting for the Fed to act quarter point after quarter point, it might make sense for you to focus more on things that are under your control, like cleaning up your credit history, paying off your debt, maybe saving more capital. Down payment,” she said.

Peter Conti-Brown, a professor of financial regulation at the Wharton School of the University of Pennsylvania, advises against trying to time the market.

“It’s going to be hard for consumers to beat interest rates because the Fed doesn’t know where interest rates are going to go,” he said. “Try as much as possible to ignore the news and look at your own financial planning regardless of what’s happening in the headlines.”

The ‘new normal’ for credit card rates

Despite two rate cuts, credit card loans are still hovering around their peak. Bankrate data shows the average credit card interest rate is 20.4%, down from a record 20.8% in August.

Bankrate senior industry analyst Ted Rossman called the drop in rates after the rate cut a “drop in the bucket.”

According to NerdWallet, sixteen percent of Americans surveyed planned to get a new credit card as soon as interest rates dropped. But Rossman said it’s too early to tell whether the rate cuts will stimulate demand for credit cards.

The Federal Reserve’s latest survey of senior loan officers showed demand for credit card loans was little changed in the third quarter ended Sept. 30.

“These rate cuts take time to trickle down to credit cards. It often takes a month or two for rate cuts to be reflected,” Rossman said. And with more economists expecting the Fed to slow its rate cuts in 2025 due to concerns about inflation, “it looks like the higher the longer, the longer this may become the rule.”