Here’s how the September 2019 Fed meeting will affect your wallet

Peter Miller
The Mortgage Reports contributor

This week’s Fed meeting could cut your monthly interest payments

The Fed meeting of September 18th is crunch day. 

The Federal Reserve must decide whether to cut bank rates, a decision which can mean lower rates for mortgages, auto loans, and credit cards.

A lot is at stake here. The Fed meeting is at the heart of a huge argument.

Does the economy need an extra push to be more productive? If so, how much should bank rates be reduced? Or is the economy doing well enough that the Fed should leave rates untouched?

The outcome of the September 2019 Fed meeting could leave lasting effects on your wallet.

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What will the Fed do?

There are two general views regarding what will happen on the 18th.

  • General opinion is that the economy needs a nudge, so the Fed will cut the federal funds rate (or “bank rate”) by 0.25%
  • The more reserved approach predicts rates will hold steady. A rate decrease, it’s argued, is unnecessary in such a strong economy

Another remote possibility, though, is that the president will get his way, with a rate cut upwards of 1%. Not many think this will happen, however.

No matter the reduction percentage, a federal funds rate cut could help reduce today’s three-year-low mortgage rates even further.

Those without mortgages stand to benefit, too. Lower bank rates could result in savings on credit cards, auto financing, and personal loans.

If interest rates move in the same direction as bank rates, a Fed cut this week could lead to substantial savings for many households.

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How the Fed meeting will affect mortgage rates

If recent history is any guide, mortgage rates and the federal funds rate will not move in lock-step. This is actually good news. Mortgage rates have fared better than the Fed rate.

In December 2008, the federal funds rate was reduced to a range of 0% to 0.25%. That remained unchanged until December 2015. During the same period, monthly mortgage rates went from 5.29% to 3.96% according to Freddie Mac.

While the Fed stood still, mortgage rates fell by 1.33%.

Between December 2015 and December 2018, the Fed raised the federal funds rate nine times, with a total increase of 2%. During the same period, monthly mortgage rates increased by only 0.68%. That’s just one-third of the Fed’s rate growth.

Between December 2018 and August 2019, the Fed cut the federal funds rate by 0.25%. During the same period, monthly mortgage rates fell more than a full percentage point.

That means over the past nine months, mortgage rates haven been reduced by more than four times the federal finds rate.

  2008-2015 2015-2018 2018-August, 2019
Federal Funds rate movement Unchanged +2% -0.25%
Mortgage interest rate movement -1.33% +0.68% -1.02%

Mortgage rate savings

Reduced mortgage rates can yield big savings for borrowers. Compared to September of 2018, homebuyers taking advantage of today’s low rates could save almost $2,000 per year. The same goes for those who refinance.

See how savings shake down for a 30-year loan on a $250,000 home:

  • At September 2018 rates of 4.54%, the monthly cost for principal and interest is $1,273
  • At September 2019 rates of 3.49%, the monthly cost for principal and interest is $1,121
  • Monthly savings for buyers and refinancing homeowners in September 2019 versus September 2018 come out to about $150 per month or $1,800 per year

Of course, the big question is whether mortgage rates will decline reduction-by-reduction with bank rates.

The Fed meeting is certainly important, and a rate cut of any size will impact the entire economy.

That said, mortgage rates are set by the market and not the Fed. A Fed rate cut on the 18th will simply boost pressure for lower mortgage rates.

Show me today's rates (Jul 16th, 2020)

How the Federal Reserve meeting will affect HELOCs

Rates for home equity lines of credit, or HELOCs, will see a more direct impact from a Fed rate cut than mortgages.

The reason? HELOCs are typically based on the prime rate. That’s the rate upon which most banks base their variable interest rates.

For instance, if you get a HELOC, the rate will likely be something like prime plus one or prime plus two. If you’re a great borrower, you might get a loan at prime.

The prime rate rises and falls in lock-step with the federal funds rate. When the Fed cuts its bank rate, prime rate will fall, too.

A 0.25% Fed rate reduction will save you about $10 per month for each $50,000 borrowed. It’s not a huge savings, but then again, we may have only seen the beginning of Fed rate cuts.

That could mean it’s time to consider that kitchen remodel or new roof. Financing big-ticket items will be cheaper.

How the Fed meeting will affect credit cards & auto loans

Credit cards are in the same category as HELOCs. They typically move in exact sequence with the federal funds rate.

So a 0.25% cut to the Fed rate means you will pay less interest on your credit card balances. You don’t have to get a new credit card to benefit. Your existing variable-rate credit card will automatically adjust.

You won’t see any savings on an existing auto loan, but if you’re in the market to buy a car, financing may get cheaper if you get a new loan after the fed rate cut.

Personal loans after the Fed meeting

Your personal loan may or may not be affected. According to USA Today, personal loans come in two varieties: variable and fixed. Variable personal loans may see a rate reduction even without refinancing. Existing fixed-rate personal loans, however, won’t benefit from a lower Fed rate. You’d have to refinance into a new lower rate.

It might be time to consider a new personal loan, though, after the Fed meeting. That’s because a new fixed-rate personal loan will probably come with a lower rate than it would have before.

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Savings account rates

Let’s face it: bank savings rates have been downright meager in recent years. But, you may have seen them rise moderately since 2015, after no less than nine Fed rate hikes.

But expect those returns to diminish once again, as the Fed likely embarks on its second rate cut in less than two months on September 18. Banks will respond by lowering savings account rates, and the most diligent savers stand to lose the most.

How the Fed meeting will affect investment and retirement accounts

The jury is out on whether you’ll see a bump in your investment and retirement account gains after the Fed rate cut.

Sometimes, the stock market will respond with enthusiasm, as lower interest rates spur spending and investment. The economy will take off like a rocket, or so the theory goes.

On the other hand, a rate cut is essentially the Fed’s admission that the economy is not as bulletproof as everyone thought. That puts investors on edge and the stock market susceptible to big dips.

As per usual when dealing with investments, you probably shouldn’t buy or sell based on the Fed meeting. Keep up a long-term and disciplined approach with your investments.

What action to take in light of September’s Fed meeting

If you believe current mortgage rates are about as low as they will go for the next few months, now is the time to lock in your financing.

If you’re counting on a Fed rate cut and believe mortgage rates are about to drop, then let your rate float with the market.

Whatever your prediction, be ready to capture a historic rate by checking rates and shopping for lenders. Start below.

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