6 Things That Get Cheaper When the Fed Cuts Rates
Once the Federal Reserve begins to lower the federal funds rate, these things should become more affordable. After years of rising interest rates, falling rates might soon be on the way. The Federal Reserve is widely expected to begin reducing its target range for the federal funds rate sometime soon, possibly as early as September. Once the Fed begins to cut rates, it should have ripple effects throughout the economy — and on your wallet. For some Americans, falling rates will be a negative. (More on that later.) But many other things will get cheaper for consumers. Here are some ways life might become more affordable once the Fed starts cutting rates — plus the bad news about rate cuts. Credit card borrowing When the Fed raises the federal funds rate, credit card interest rates climb — and borrowers with big balances quickly find themselves drowning in a sea of red. So, you can think of the coming rate cuts as a series of life preservers. As the federal funds rate falls, credit card borrowing costs should drop in tandem, bringing some relief to those who carry a balance month to month. Of course, you would be much better off eliminating that debt altogether. For more on how to do so, check out “10 Steps to Get Out of Debt Now and Stay Out of Debt Forever.” Home loans Today’s mortgage rates are much higher than they were a few short years ago. That has left many would-be buyers unable to afford a home. A falling federal funds rate does not directly impact fixed mortgage rates. However, the two types of rates are not completely unrelated. As we have explained: “There is a widespread myth that when the federal funds rate climbs, rates on fixed mortgages follow right behind it. That isn’t exactly so. There is no direct connection between the federal funds rate and fixed mortgage rates. However, the two do tend to move in the same general direction.” The federal funds rate tends to have a more direct impact on the direction of adjustable-rate mortgages (ARMs). As the federal funds rate falls, you can expect that your ARM rate might also decline the next time it resets. So, a climate of lower interest rates overall should also be good news for those who want to buy a home and for many who already have an adjustable-rate mortgage. Mortgage Refinancing Mortgage refinancing also should look more attractive in a falling-interest-rate environment. It is unlikely that rates will fall low enough to benefit those who currently enjoy a mortgage in the 2% to 3% range — although the future is never clear, and anything is possible. But those who took out mortgages in 2023 when rates were close to 8% might find a refinance looking more attractive in the near future. Car loans Like just about everything else in these inflationary times, cars have grown more expensive. Falling car loan rates would go a long way toward restoring affordability for millions of buyers. As the federal funds rate falls, car loan costs should follow suit. As you wait for rates to become more attractive, try to save for a larger down payment. The more money you put down, the less you will pay in interest costs on a car loan. Home equity borrowing The rate on a home equity line of credit is typically variable. That means that as the federal funds rate falls, home equity borrowing costs also should decline. It’s a different story for home equity loans, however. These typically have fixed rates, which means a falling federal funds rate should have no impact on those who already have agreed to loan terms. Business loans If you are a budding entrepreneur, your costs could become a little lower once the Fed begins to cut rates. The U.S. Small Business Administration’s 7(a) loan program — the SBA’s most widespread loan program — offers variable-rate loans. That means these rates can climb and fall with the federal funds rate. The bad news Falling rates will be a boon for millions of Americans. But other folks may be less thrilled about lower interest rates. For example, rates on savings accounts and certificates of deposit will likely begin to drift lower once rate cuts begin. That means if you have gotten used to savings rates of 5% — or higher — you might have to settle for a deal that is not as sweet. Overall, those who are on fixed incomes and who carry little to no debt are likely to shed a tear or two as interest rates fall, even if falling rates may benefit the economy as a whole.
Should You Rent Out or Sell Your House?
Figuring out what to do with your house when you're ready to move can be a big decision. Should you sell it and use the money for your next adventure, or keep it as a rental to build long-term wealth? It's a question many homeowners face, and the answer isn't always straightforward. Whether you're curious about the potential income from renting or worried about the responsibilities of being a landlord, there’s a lot to consider. Let’s walk through some key questions to ask to help you make the best decision for your situation. Is Your House a Good Fit for Renting? Even if you're interested in becoming a landlord, your current house might not be ideal for renting. Maybe you're moving far away, so keeping up with the ongoing maintenance would be a hassle, the neighborhood isn't great for rentals, or the house needs significant repairs before you could rent it out. If any of this sounds like it might apply, selling might be your best option. Are You Ready for the Realities of Being a Landlord? Managing a rental property isn't just about collecting rent checks. It's a time-consuming and sometimes challenging job. For example, you may get calls from tenants at all hours of the day with maintenance requests. Or you may find a tenant causes damage you have to repair before the next lease starts. You may even have to deal with people falling behind on payments or breaking their lease early. Investopedia highlights: "It isn’t difficult to find horror stories of landlords troubled with more headaches than profits. Before deciding to rent, consider talking to other landlords and doing a detailed cost analysis. You might find that selling your home is a better financial decision and less stressful.” Do You Have a Good Understanding of What It’ll Cost? If you're thinking about renting out your home primarily to generate extra income, remember that there are additional costs you’ll want to plan for. As an article from Bankrate explains: Mortgage and Property Taxes: You still need to pay these expenses, even if the rent doesn't cover all of it. Insurance: Landlord insurance costs about 25% more than regular home insurance, and it's necessary to cover damages and injuries. Maintenance and Repairs: Plan to spend at least 1% of the home's value annually, more if the home is older. Finding a Tenant: This involves advertising costs and potentially paying for background checks. Vacancies: If the property sits empty between tenants, you'll lose rental income. Management and HOA Fees: A property manager can ease the burden, but typically charges about 10% of the rent. HOA fees are an additional cost too, if applicable. Bottom Line To sum it all up, selling or renting out your home is a personal decision that depends on your circumstances. Whatever you decide, taking the time to evaluate your options will help you make the best choice for your future. Make sure to weigh the pros and cons carefully and consult with professionals so you feel supported and informed as you make your decision. That’s what we’re here for.
8 Common and Costly Home Shopping Myths, Debunked
Think you're ready to buy a house? Don't fall victim to these rookie mistakes. Buying a home is a complicated financial transaction, so it’s no surprise that there are quite a few myths that surround homebuying. Unfortunately, these common beliefs can cost you money or prevent you from getting a home. Before starting house hunting, make sure you aren’t falling prey to the following misconceptions. Here's what writer Miranda Marquit says about the 8 Home Shopping Myths.
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