A Federal Reserve rate cut lowers rates on credit cards, home equity lines and adjustable rate mortgages. It also decreases bank savings rates.
Borrowers have been taking it on the chin the past few years, with the Federal Reserve raising interest rates nine times since late 2015.An expected quarter-percentage-point rate cut by the Fed on Wednesday and the possibility of three more decreases within the next 12 months likely would trim rates and monthly payments on credit cards, home equity lines, adjustable-rate mortgages and auto loans.
Still, “On the margins, it will help people with debt,” says Steve Rick, chief economist of CUNA Mutual Group, an insurance and financial services company. A quarter-point reduction on a $30,000 home equity line of credit would shave the monthly payment by $6.25, McBride says. Two such cuts would trim the bill by $12.50. By contrast, the nine rate increases since late 2015 have lifted the same payment by $56.
Fixed-rate mortgagesThe Fed’s key short-term rate affects 30-year mortgages – the most common purchase home loan – and other long-term rates only indirectly. Those rates more closely track inflation expectations and the long-term economic outlook, and have already fallen substantially in recent months as concerns about the economy and low inflation have grown. The average rate has dropped to 3.75% from 4.5% a year ago, according to Freddie Mac.
Student loansMany private student loans come with variable interest rates that follow the prime rate. When the loan rate adjusts depends on what's written in your loan terms. For instance, your monthly payment will decrease for those on a regular payback schedule. But if you're on an income-repayment plan, your monthly payment won't change, but a lower portion will go toward interest rather than principal.
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