As Interest Rates Fall, Opportunities Rise

By Robert Frick | March 26, 2020  

In response to COVID-19, two powerful forces have pushed bond rates to historic lows, making now an especially profitable time to refinance and lower payments. Those forces: the Federal Reserve cutting its base rate to zero, and powerful demand for U.S. Treasury bonds. This demand has driven prices up and yields down—reducing the interest consumers pay on some types of loans.

The mechanics of how and why the rates have moved is complex. To put it simply, the Federal Reserve dropped rates to stimulate the economy, and Treasuries are the world’s safest investment, making them a safe harbor for money as stocks and other investments have taken a beating.

Savings Accounts

Lower rates mean rates on savings accounts and certificates (CDs as they’re known at banks) are dropping. The good news is that while savings and money market savings accounts have variable rates and are falling with rates in general, CD rates are fixed for the length of the CD, and some good rates remain—for now. These high CD rates won’t last for long. So now is a good time to lock in higher rates on a certificate.

Mortgages

The biggest opportunity to save with these lower rates is mortgages. Mortgage rates usually are roughly tied to the 10-year Treasury yield—as that yield plummeted, so did they.

Recently, the 30-year fixed mortgage rate was under 4%, and the 15-year fixed rate was just above 3%. But rates are changing constantly, so if it makes sense to refinance now, do it—nobody knows in which direction rates will go in these uncertain times.

Before you refinance, use a mortgage calculator to see how much you could save and what your breakeven time period would be. Breakeven is how many months of lower mortgage payments it will take to cover your closing costs. For example, if you plan to stay in your house for more than five years, you’ll want your breakeven to be less than that length of time.

Given the spread between 15-year and 30-year fixed mortgage rates, you may want to consider refinancing to a shorter-term mortgage if you can afford it. Yes, the payment will be higher, but you’ll pay tens of thousands less in interest while building equity more quickly.

Many homeowners are already rushing to refinance their mortgages. In a recent week, mortgage applications had soared 400% from a year earlier, with three-quarters of those for refi’s. That has created backlogs and delays at many mortgage lenders, which may make for a frustrating refinancing process. Even still, according to a recent estimate, refinancing is worth the trouble for up to 11 million American homeowners.

Credit Cards

The Fed rate cuts have implications for credit cards as well. Your credit card rate is variable and will likely fall—though not by as much as the rate cut. It will generally take one or two months before you’ll see a change in your statement.

Analysts see card rates dropping by half to a full percentage point, which won’t make a big difference to your payments. For example, if you have an 18% rate on $10,000 in credit card debt, that’s up to $1,800 a year in interest. If that falls to 17%, you may be saving only $100 a year.

Instead, look for a card that offers a zero percent interest rate and transfer your existing balance to it. Put yourself in an even better position by choosing a card with a low ongoing rate. That way, even after the temporary zero percent interest ends, your interest charge remains low. Note that if you have a Navy Federal Credit Card already, you cannot transfer that balance to another Navy Federal card.

Auto Loans

While auto loan rates are expected to dip some, they haven’t been directly responsive to Fed rate cuts in recent years. If you do have a high auto loan rate and want to refinance, know that right now, the average rate on a new car loan is just under 6% for a five-year loan.

If you choose to refinance your car loan but plan to buy another vehicle while still paying off the refinanced loan, you may want to consider shortening the term of the refinanced loan to pay it off before buying another car. The number of people who still owe money on their car loan when they go to buy another car—rolling the old loan into the new loan—is rising. The results are higher payments and often higher loan rates, which isn’t a situation you want to be in.

Student Loans

In the student loan world, we’ve seen changes as well. The government will stop charging interest and suspend payments on federal student loans for at least 60 days. While this applies only to federal student loans, not private, that includes more than 90% of student loan debt.

This is all to say that we’re seeing effects across many areas of personal finance. No one knows for sure when rates will make their next big move, so if you find a good opportunity, act quickly.

Robert Frick is a corporate economist for Navy Federal Credit Union.