4 Expert Tips for Borrowing, Refinancing, and Investing After Interest Rates Drop

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• The Federal Reserve cut interest rates at its September meeting.
• As rates fall, experts say it’s a good time to consider major financed purchases and refinancing debt.
• It is also an opportunity to review your retirement plans.

With inflation starting to level off and the Fed cutting interest rates at its September 18 meeting, many experts believe rates are only just beginning to fall. That’s both good and bad news for consumers and investors. After all, lower rates help consumers save when they borrow money, but they also translate into lower rates on savings and money market accounts.

Still, consumers looking to “get ahead” financially should look for opportunities created by lower interest rates, especially if the interest they earn on savings products is set to decline.

1. Refinance your mortgage and other debts

Lower interest rates create an environment where refinancing some of your loans makes financial sense. This is true for home loans, personal loans, or even auto loans that were taken out when rates were higher than they will be once the rate cut takes effect.

Mortgage rates have started to fall in anticipation of the Fed’s expected rate cuts, and Jennifer Beeston of Guaranteed Rate Mortgage says now is a great time to check with a mortgage lender to see if you can get a lower rate and save money.

Even relatively small rate drops can result in significant savings when refinancing a home. For example, mortgage calculators show that a $300,000 30-year fixed-rate mortgage at 6.5% requires a monthly payment of $1,896.20 (principal and interest), while the same loan at 6.0% requires a monthly payment of $1,798.65. The savings become even more pronounced when rates drop more than half a percentage point over time.

Homeowners with significant equity might even consider refinancing to tap into those funds for a number of reasons. “For homeowners with high-interest credit cards, this could also be a good time to consider a cash-out refinance to consolidate debt and reduce the burden of monthly payments,” Beeston said.

Other debts can also be refinanced to save money, including personal loans and auto loans. If you’re not ready to refinance yet (or want to wait for further rate cuts), there are steps you can take to prepare yourself financially as much as possible, including checking your credit score and paying down unsecured debt.

2. Consider new savings and investment products

Stephen Kates, a financial advisor with RetireGuide, says consumers should assess their risk tolerance before making changes to where and how they save and invest.

Still, it may be wise to consider savings products other than the ones you currently use, either before or after rates drop. For example, a 5-year certificate of deposit may yield less than a 1-year CD right now, but that may not be the case in the future if the Fed cuts interest rates repeatedly in the coming months and years. Laddered CDs, bonds or fixed annuities can also serve as a compromise for those who need to balance liquidity and yield, Kates said.

The advisor also says investors with a higher risk tolerance and a long-term investment horizon may want to consider allocating more funds to stocks and other equity securities.

“Certain sectors such as utilities, real estate and consumer discretionary tend to perform particularly well during declining rate cycles,” he said.

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3. Rethink major, financed purchases

According to Cliff Ambrose, a financial advisor with Apex Wealth, lower interest rates can make certain larger, financed purchases much more attractive. For example, borrowing money at lower rates can make it easier to buy a home, finance a car or start a business.

Lower interest rates can also help potential buyers afford a more expensive home because less of their eligible mortgage payment goes toward interest each month.

That said, Ambrose advises consumers to be cautious about taking on more debt unless it aligns with their long-term financial goals. “Just because borrowing is cheaper doesn’t mean it’s the right time to make a big purchase, especially if it’s going to put a strain on your budget,” he said.

4. Evaluate your income

Financial advisor Lawrence D. Sprung of Mitlin Financial also recommends finding out whether lower rates could impact your income, especially if you’re living off your retirement savings.

“When it comes to investing, it’s time to evaluate your portfolio and see how lower interest rates are going to affect you,” he said. “Will your monthly income decrease? If so, how will you replace that income with lower interest rates?”

If you’re concerned that falling savings rates will cause you to deplete your retirement resources faster, Sprung advises starting by ensuring your portfolio is positioned for a lower rate environment and that it aligns with your personal goals and risk profile.

“A plan should be in place in the event of misalignment to work towards aligning your portfolio with the new rate environment,” he said.

If you’re unsure how to create a portfolio that generates the income you need to live on in retirement, working with a qualified fee-only financial advisor may be your best option.

Holly Johnson

Freelance writer