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How to Make the Most of Low Interest Rates

Apr 09, 2020 4 min read Ben Gran

Key Takeaways

  • Falling interest rates could boost you financially
  • Now could be a good time to refinance your mortgage
  • Look for ways to consolidate or pay off debt and open lines of credit

 

 

The coronavirus pandemic has caused economic disruptions around the world. To support the U.S. economy and avoid longer-term damage to the financial system, the Federal Reserve recently cut its "funds" rate to 0%. That’s the interest rate banks use to lend each other money overnight. And it typically leads rates on everything from savings accounts to mortgages to credit cards in the same direction.

Falling rates can be good news if you’re planning to borrow money or have loans with variable rates — but not so good if you rely on income from bonds or bank CDs. (In general, lower rates increase the prices of bonds, which only helps if you sell them.) The rates you pay to borrow are also affected by your credit score, the type of loan and other factors.

Here's how the recent interest-rate moves might affect your day-to-day finances — and what you can do to make the most of them.

 

Mortgages

Mortgage rates aren't directly connected to the Fed's interest rates; instead, they tend to follow the rates of 10-year U.S. Treasury bonds. Yet even though they’ve been at historically low levels lately, mortgages will probably be even cheaper for the foreseeable future.

  • For home buyers: Due to the weakening economy, home sales (and prices) are likely to fall in the coming months. But if you’re in the market (and financially stable), the combination of lower interest rates and lower prices could give you more buying power and confidence in making an offer.
  • For homeowners: If you own a home and have an adjustable-rate mortgage (ARM), there’s a good chance your monthly payments will fall the next time your rate is scheduled to change. Even if you have a fixed-rate mortgage, find out if refinancing your loan will let you lock in a lower interest rate. Depending on the difference, that could save you hundreds of dollars a on your monthly payment — and tens of thousands on interest over the life of your loan.

 

Student loans

If you have college debt with multiple lenders, lower rates could be an opportunity to consolidate student loans. By repackaging multiple loans into one monthly payment and locking in a lower interest rate, you could save significantly over the next several years. (Also note that if you have federal student loan debt, the new CARES Act suspends your payments — and interest — through Sept. 30, 2020. This doesn’t apply to private loans.)

 

Credit cards

If you carry credit card debt, you could be paying annual interest as high as 20% or more. (Such nosebleed-level rates are reserved for those with lower credit scores or who get “instant” credit through store-branded and other cards.) Lower interest rates might reduce your payments and make it easier to pay more than the minimum due each month (which you should try to do anyway). Even in today’s climate, you can pay less on your “drastic plastic.”

If you own a home and have good credit, lower interest rates also present an opportunity to pay off higher-interest credit card debt via a “cash-out” home equity loan or line of credit with a lower interest rate. This provides a more manageable monthly payment to help you get out of debt faster.

 

Lines of credit

Like a credit card, a line of credit is “revolving” debt: You have some flexibility in how much you borrow and how quickly you repay. If you have good credit, now might be a good time to apply for a personal line of credit from a bank.

If you’re a homeowner and have been waiting to make major repairs or renovations, a home equity line of credit (HELOC) can be especially helpful. Because the debt is secured by your home, interest rates are typically lower than for credit cards and other personal loans.

 

 

What you can do next

Low interest rates offer several opportunities to improve your personal finances. If you own a home, consider refinancing your mortgage. If you’re in the market to buy, go bargain-hunting. If you have credit card balances or student loans, consider consolidating to get out of debt faster and lower your monthly payments.

Footnotes

 

Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, public policy, financial services, technology, and business.

 

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