Home Personal Finance 7 Ways to Improve Your Finances When Interest Rates Drop

7 Ways to Improve Your Finances When Interest Rates Drop

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Before making any money moves, take a step back and understand how a drop in interest rates affects your finances.

Recent inflation data shows the July 2024 rate dropped to 2.9%, the lowest since March 2021. Due to that positive information and a strong labor market, the Fed is expected to cut interest rates soon.

The Fed has two primary goals: keeping prices stable and maintaining a low unemployment rate. They can raise or lower the federal funds rate, the interest rate at which banks borrow and lend to one another, to achieve those objectives. 

The federal funds rate affects what consumers pay for debt, like credit cards and loans, or receive on interest-bearing accounts. When interest rates decline, rates for products like mortgages, personal loans and credit cards go down, which is terrific for borrowers.

However, there are fewer benefits for savers because you earn less on savings, money market accounts and CDs when interest rates decline. 

Smart Money Moves When Interest Rates Drop

With a potential rate cut looming, consider making the following seven money moves to improve your finances.

1. Buy a certificate of deposit (CD).

Potential interest rate cuts mean CD yields will fall. However, you can lock in today’s higher rates, such as 5% or more, for a fixed CD term and enjoy a competitive return for years. 

Therefore, a CD is an excellent option for cash you plan to spend within the next year or two, such as a home down payment. They’re also great if you’re getting close to retirement or are retired and want to earn as much as possible while keeping your money safe.

Note that you typically pay a penalty if you withdraw money from a CD before the term ends, known as the maturity date. Shop and compare the best CD rates to lock in the highest return on your cash.

2. Check your savings rate. 

Higher returns on variable-rate saving accounts will fall when interest rates get cut. Financial institutions can change what they pay on savings and may not notify you when you earn less.  

So, check your savings rate and shop for higher-yielding options if you see a significant interest drop. You can quickly move your savings to a high-interest savings account so it earns more for you. 

Maintaining enough emergency savings to weather a crisis, such as losing your job or business income, is wise. Consider keeping at least three to six months’ worth of living expenses in FDIC-insured savings to preserve your balance and keep it liquid. 

But as interest rates decline, don’t keep too much cash in savings. You’re better off investing for higher returns when you want to reach aggressive financial goals like retirement.

3. Tap your home equity.

If you’re a homeowner who’s enjoyed price appreciation, tapping your swelling home equity could be an excellent source of low-rate funds if you’re considering borrowing for 

remodeling, debt consolidation or any purpose.

With a variable-rate home equity line of credit (HELOC), your available credit line will get less expensive as interest rates fall. That’s a better option than taking out a fixed-rate home equity loan.

4. Refinance your student loans.

If you have private student loans, refinancing or combining them into one new loan with a lower interest rate can make it easier and more affordable to repay what you owe. So, look at your loans and contact your lenders about saving money by refinancing.

Be sure you won’t lose any significant benefits from your original loan with student loan refinancing. 

5. Evaluate mortgage refinancing. 

If you bought a home when mortgage rates were higher, refinancing may be wise when rates drop at least 0.5% to 0.75% below your current mortgage rate. Consider how much money you’d save on a new payment compared to your current payment, including refinancing fees. 

Refinancing a mortgage could cost 2% to 6% of your new loan amount, depending on your lender and home state. So, get multiple quotes from mortgage refinance lenders and compare the best offers. 

6. Delay financing. 

If you’re considering financing a big purchase, like a home or car, waiting could be wise. Lower interest rates reduce financing costs, and more interest rate cuts could be coming.

While you can’t perfectly time a significant purchase, when it’s possible, try to wait until you see rates coming down. That will make your monthly payments more affordable or allow you to pay a higher purchase price.

7. Maintain good credit.

No matter what happens with interest rates, your credit is a significant factor in how expensive it is to borrow money. So, building a good credit score always pays off. 

In addition, good credit helps you save money by paying less for auto insurance, home insurance and utility deposits. It can also help you get approved to rent an apartment, receive premium offers and even land a job with an employer that checks credit.

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Laura Adams
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