How Do You Take Advantage of the Federal Interest Rate Cut?

By Xin Lu on 24 January 2008 (Updated 23 September 2014) 3 comments

I just came back from a company retreat without internet and I found out that the Fed has cut the interest rate by 0.75%! This is the largest cut since the one percent cut in 1982 and it did manage to boost the sagging stock market. So how can you as a consumer take advantage of this development?

1. Consider a Mortgage Refinance - Getting a refinance is only beneficial if your home's value is above the amount of debt you have outstanding and you stand to save a lot of money after paying the fees on the refinance process. The last time the Fed cut the rates drastically in the first half of 2001 my parents were able to refinance their mortgage from 30 years to 15 years and reduced the rate by more than 2%. That move saved them tens of thousands of dollars over the years. However, long term mortgage rates do not track Fed interest rates directly so most likely they will not go down by 0.75%. If you have very good credit and an adjustable rate mortgage it is also be a good idea to lock down a fixed rate that is low.

2. Lock in a Low Rate for a Large Purchase - If you need to finance a large purchase such as a car or a house this rate cut is very beneficial to you because the rate the lenders charge most likely will fall a bit. The caveat is that you do need excellent credit because lending guidelines have tightened lately. However, this is no excuse to go out and buy a new car you do not need just because you can borrow more money at a lower rate!

3. Save Money on Your HELOC
- If you do have a home equity line of credit your borrowing rates will come down because it is closely tied to the prime rate (3% above the Fed's interest rate). This means that if you did borrow from your HELOC you would have an easier time paying it back. This is a good opportunity to reduce debt because even if you pay the same amount as before more of your payment will be applied to the principal.

4. Cut Down Your Credit Card Debt
- Credit cards generally have very high rates, but most of them do track the prime rate which is tied to Fed rate. So it is possible that banks will reduce the interest rate they charge consumers. Once again, this is a great window to reduce your debt without paying extra money. You can also request an interest rate reduction or shop around for a card with a lower rate because banks are probably more willing to take a rate cut.

5. Start a Business with Loans - The cut is good news for those who borrow money for their business because the money their business spends on interest will be reduced. So if you want to start a business and need to borrow startup cash then this is a good time to do it. The Fed's hope is that more people will inject money into their businesses and create more jobs.

Many people believe that the Fed will cut the rates again in their meeting at the end of this month, so it will be even cheaper for people to borrow in the very near future. This is not exactly great news for savers like me because a cut in the interest rate means higher inflation and a lower yield on my money market funds. However, this is a great time for those who have debt to reduce what they owe and for businesses ideas to flourish.

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Myscha Theriault's picture

A practical list of tips. Thanks!

Guest's picture

There's always an opportunity in difficult times. With interest rates this low it expands the opportunity to save money or make a wise investment. Great post Xin!

Xin Lu's picture
Xin Lu

Hey Myscha and Bob!

Thanks for the nice comments. On the topic of opportunity in difficult times, I wrote about a recent talk my company's CTO gave on my personal blog and it really addresses that issue. Here it is . Hope you like it!