Why Interest Rates Going Down Matters (To You)!

How to best position yourself when rates come down.

In 2022 the Fed started raising rates… meaningfully.

We all felt it… the good and the bad: higher savings rates, mortgage payments, and less “free money.”

Here’s how to position yourself if and when they drop them again.

Lock it in.

Check your bank, there are still likely CDs earning 4 and 5%.

If not having access to your money isn’t an issue, and you believe the stock market is “overvalued,” then locking in these higher rates (while they last) could be attractive.

Pay Off Debt.

Credit card (and any other variable-rate) debt is usually based off of the “Prime Rate,” a rate set by banks that’s usually 3% higher than the Fed’s.

When the Fed cuts rates, the banks cut rates, making your interest payments cheaper.

At lower interest rates you may want to be more aggressive paying down debt, as more of your payments are going toward principal.

Don’t Pay Off Debt.

HELOC’s, Adjustable-Rate Mortgages, and Business Loans typically have a tighter spread to Prime Rates than your Credit Card and other forms of unsecured debt (Personal Loans).

In plain English, this means your Credit Card is going to have interest that is 10-20% higher than Prime, whereas a HELOC or an ARM will only be 1-5%.

If the long-term average return of the stock market sits between 8 and 10%, then you might be better of investing your money rather than aggressively paying down these obligations.

Why?

Because getting paid 8-10% is better math than paying someone 4% (3% Prime + 1% HELOC).

Buy a House (maybe).

Interest rates quintupling caused mortgage payments to double and triple… hopefully some of this will be reversed when rates come down.

That said, lower mortgage rates means more demand, and more demand means higher prices… so some of this reversion may be offset.

All things considered given that Mortgages are 15- and 30-year contracts, you may want to take advantage of locking in lower rates when they fall.

Refinance.

If you bought a home in the last 2 years, that purchase was likely accompanied by a pitch to refinance your mortgage when rates drop… well the long-awaited time might be here.

Further if you have variable rate debt (like the examples listed previously,) you most certainly will be solicited with opportunities to refinance them… it’d be wise to consider these options as well.

Cheers