Fed Rate Cuts: What They Might Mean for Your Money

If you’ve been following the news lately, you’ve likely seen that the Federal Reserve has finally started cutting interest rates after 2+ years of consecutive rate hikes. And now you’re probably wondering: What exactly does this mean for my wallet?

Our experts break down the potential impact of fed rate cuts in three key areas that matter most to customers like you: home and auto loans, savings accounts, and investing. Let’s dive in!

Home & Auto Loans: Look for Favorable Terms

Lower interest rates are fantastic news for anyone in the market for a home or car, or looking to refinance an existing loan. We spoke to Carolyn Gorman, our Managing Director of Mortgage Lending, and Tim Skinner, our Managing Director of Consumer Lending, about how buyers can prepare for a major purchase.

1. Look Beyond Interest Rates. In addition to the interest rate, “Anyone buying a home or car should look at the Annual Percentage Rates (APR), which includes additional fees and charges like closing costs, origination fees, and mortgage insurance,” says Gorman. Like interest rates, an APR is expressed as a percentage—"but it gives a clearer picture of what they’ll really be paying,” Gorman adds. For home buyers, buying points (or paying additional fees to the lender for a reduced interest rate) might be a viable option. Our points calculator can help you determine whether buying points is financially feasible.
2. Create a Down Payment Strategy. A 20% down payment is considered ideal when purchasing a home, but prospective home buyers should decide what the best approach is for them, Gorman says. For instance, if a 20% down payment eats through your emergency fund, you might consider a smaller down payment if you can afford the monthly PMI costs. First-time home buyers can also explore programs that offer low down payment options, like FHA or VA loans.
   
   For current homeowners, their equity position in their current home can be an element of their down payment strategy. Often, they can leverage that equity for a down payment on a new home. They might also consider keeping their existing home as a rental property for additional income (though that route requires careful evaluation of how two mortgages impact debt-to-income ratio).
3. Understand Pre-Approvals and Rate Locks. Home buyers can get pre-approved and lock in a favorable rate to streamline the buying process. “Just be sure to know how long your rate lock lasts, and whether a delayed closing will impact that rate,” Gorman advises.
   
   This advice also applies to those shopping for a new or used car, according to Tim Skinner. “It’s always a good idea to obtain pre-approval for an auto loan to help you shop with confidence and shorten the buying process at the dealership,” he says.
4. Consider Refinancing. Want to potentially lower existing mortgage or car payments? For those who purchased when inflation was at its highest, refinancing might save substantial money over the long term. Securing a new loan with a lower interest rate can reduce your monthly payments, so mortgages or auto loans could be paid off faster.

Savings Accounts: Shifting Strategies

The flip side of lower interest rates? Savings accounts and other low-risk investments will likely offer lower returns. Jill Garvey, CPA, CFP(R), Senior Vice President and Senior Wealth Strategist at Huntington, notes that savers can still watch their nest egg grow with a few strategic tweaks.

1. Understand Your Cash Flow: Cash flow is king, says Garvey. “Understanding your cash flow—whether you’re working and contributing to savings and investments, or whether you’ve transitioned to living off of those assets—can help you determine how much you need to have on hand and what can be invested.”
2. Don’t Keep Too Much Cash on Hand. Too much cash leaves money vulnerable to inflation and misses out on potential gains, while too little cash can prevent investors from seizing opportunities when they arise.
3. Utilize High-Yield Savings Accounts: A high-yield savings account offers higher interest rates than traditional savings accounts. As interest rates decline, Garvey says, it’s essential to shop around for the most competitive rates that give the best returns.

Investing: Stay the Course

Fed rate cuts can sometimes lead to increased market volatility as investors adjust to the changing economic landscape—but there are also opportunities to be seized, says Garvey.

1. Be Smart with Your Asset Allocation: “What drives 96% of returns is asset allocation—and asset allocation will fully depend on someone’s short- and long-term financial goals,” Garvey says. Investors should evaluate how their money is invested in different vehicles like stocks, bonds, property, and cash, and adjust accordingly to best fit their unique goals.
2. Time in the Market > Timing the Market: Making regular contributions at steady intervals will almost always outperform making large investments at the “perfect” moment, says Garvey. Maintaining a diversified investment portfolio over several years has historically proven to be a more effective strategy for generating returns.
3. Consult a Financial Advisor: If you're unsure how fed rate cuts will impact your investments, consult with a financial advisor to discuss your specific situation, Garvey says. “A financial coach can take the emotion out of decisions and help you evaluate whether your current mix will allow you to achieve your goals.”

The impact of these rate cuts may take some time to be fully felt. Nevertheless, navigating the complexities of a changing interest rate environment might seem daunting—so never hesitate to ask a financial professional for guidance on how to position yourself for long-term financial success!