INTEREST RATE DROPS: SIDE EFFECTS OF LOWER RATES
The Fed has dropped interest rates by half a percentage point (50 basis points) in an effort to counteract any effects of a slowing economy due to the Coronavirus outbreak. While this is great news for existing homeowners to lower your mortgage payments and for new home buyers to qualify for a new home loan, there are some other side effects to these low interest rates.
The primary issue is that your bank’s savings’ rates are also at historic lows. With inflation rates of approx. 2.5% (in 2019) you are likely making ZERO money from your bank savings.
Another side effect of lower interest rate is the tendency to buy other personal and household items with credit cards. However, most credit card companies will not have a lower interest rate, and some, depending on your credit score and payment history, may have rates as high as 24.99%. The higher rates mean you will not be paying off the card any time soon (assuming you make minimum payments and make no other purchases) in 10-15 years. Higher credit card debt will counteract any potential savings from a lower interest rate if you refinance your home.
So, if you own a home and have equity, this may be a great time to refinance with a cash-out to pay off those high interest credit cards. Just remember that borrowing more on your home also erodes your equity – your safety net in the event of a real estate.
Lastly, your second biggest investment is typically a car. With lower rates you may be attracted to purchasing a new car. But be careful, as dealership rates generally can be higher than what you can get at a local bank, and the purchase can lock you in for the next 5-6 years in car payments. Used car interest rates are also higher than new cars, so be sure to factor in all the new or additional costs of a new car purchase including payment terms, interest rates, car insurance, etc.