The Federal Reserve announced a 50 basis points or half percentage point interest rate cut at the conclusion of its two-day meeting on Wednesday. This decision marks the central bank’s first rate cut since the onset of the Covid pandemic. As a result, some Americans may seek to leverage the new rate adjustment.
Stephen Foerster, a finance professor at Ivey Business School in London, Ontario, stated that the impact of lower rates would vary based on whether households have variable or fixed financing rates. Certain rates adjust promptly, while others may not reset at all unless refinancing is an option.
A recent report from NerdWallet revealed that 18% of consumers plan to refinance a loan following a rate decrease, based on a survey of over 2,000 U.S. adults conducted in July.
While refinancing can be financially beneficial, experts suggest it is crucial to consider the type of loan and other factors. Mortgage rates, influenced by both the Federal Reserve’s policies and Treasury yields, may continue to fluctuate. Jacob Channel, a senior economic analyst at LendingTree, emphasized that most homeowners still hold lower rates on their loans than what is currently available, notably those who purchased homes in the last two to three years. Approximately 82% of homeowners have rates below 5%, and 62% have rates under 4%, based on a Redfin analysis.
Channel also noted that there is no universal rule for mortgage refinancing. Some advise waiting until securing a rate at least 50 basis points lower than the current rate, while others recommend waiting for a 100 or more basis point difference. Other considerations include creditworthiness and refinancing closing costs, which usually range between 2% to 6% of the loan amount.
Regarding credit card debt, most credit cards are tied directly to the Federal Reserve’s benchmark. The average credit card rate had risen from 16.34% in March 2022 to over 20% today, nearing a historic high. These APRs will decrease marginally following the rate cut. Refinancing high-interest credit card debt remains advisable, according to Matt Schulz, chief credit analyst at LendingTree. Options include using a 0% balance transfer card or obtaining a low-interest personal loan, provided the borrower has a good credit score. Alternatively, consumers can request a lower interest rate from their credit card issuer, which could result in a significant reduction.
For auto loans, which usually have fixed rates, the rates on new-car loans will decrease in alignment with the Fed’s adjustments. However, refinancing existing auto loan debt depends on several factors. Ivan Drury, Edmunds’ director of insights, explained that auto loan interest is front-loaded, meaning much of the interest is paid in the initial years. This structure might require additional equity or cash for refinancing to be beneficial.
Lastly, student loan borrowers with variable-rate private loans may consider refinancing as rates drop. Higher education expert Mark Kantrowitz points out that borrowers might refinance to take advantage of lower interest rates or improved credit scores. However, refinancing federal loans into private loans would forfeit federal benefits such as deferments, forbearances, income-driven repayment plans, and forgiveness options. Additionally, extending the loan term could lead to higher overall interest payments.
