Interest rates have been in the news more frequently over the last few years, with rising and falling rates trickling into several parts of the economy. When they go lower, following a move by the Federal Reserve, that's good news for some people. For others, not so much. It all depends on your spending, savings, debt and other aspects of your finances.
Lower interest rates are beneficial if you have variable-rate debt, such as variable-rate credit card balances, lines of credit and home loans. In that case, you can expect those interest payments to decline (assuming you haven't increased your underlying balance). However, for certain savings and investments, lower interest rates are far from good news. Here's a look at how lower interest rates can affect your financial plan.
What Are Interest Rates?
Interest rates are the cost of borrowing money or the return on savings, typically expressed as a percentage. The Federal Reserve sets a key interest rate called the federal funds rate, which is the target rate for overnight lending between banks. Changes in this rate often ripple through the economy, impacting other interest rates like those on savings accounts, loans, credit cards and mortgages.
The rate reached nearly 20% in the early 1980s and has remained near zero percent for much of the last decade. The Fed tends to raise the rate to fight inflation or prevent an overheated economy. It lowers the rate to increase economic activity and decrease unemployment, among many other goals. A change to the interest rate has significant economic consequences for consumers and businesses alike.
Interest rates through the decades
| Year | Federal Funds Effective Rate |
| 1960 | 3.99% |
| 1970 | 8.98% |
| 1980 | 13.82% |
| 1990 | 8.23% |
| 2000 | 5.45% |
| 2010 | 0.11% |
| 2020 | 1.55% |
*January 1 interest rates
Rates dropped near zero during the height of the COVID-19 pandemic and increased quickly in 2022 into 2023 to fight subsequent inflation.
How Lower Interest Rates Can Impact Your Savings
When interest rates drop, the rates on savings accounts and certificates of deposit (CDs) usually go down too. For example, if the Federal Reserve cuts its target interest rate by 0.25%, you'll probably see a similar decrease in your savings account rates, though it might not be an exact match.
To protect yourself from falling interest rates, consider opening a long-term Synchrony Bank CD before rates drop further. If you don't want to lock away your money for too long, a CD ladder—where CDs mature at different times—lets you earn higher interest while still having access to some of your money.
Even with lower rates, a high yield savings account is one of the best places to keep your cash safe for the short term, such as for emergencies or a down payment on a home. Like Synchrony Bank CDs, high yield savings accounts are generally FDIC-insured, making them a very safe option for storing your money.
How Lower Interest Rates Can Impact Your Home
When the Federal Reserve lowers short-term interest rates, it doesn't automatically mean long-term mortgage rates will drop right away—or at all. The mortgage market may expect these changes in advance, so if a rate cut is anticipated, 30-year mortgage rates might not fall much unless the Fed keeps cutting rates. And the impact on your mortgage payment largely depends on whether you have a fixed-rate or variable-rate mortgage.
Even if you rent, a decline in interest rates could offer a good opportunity to buy a home when your lease ends. However, keep in mind that lower mortgage rates often lead to higher demand for housing, which can drive up home prices.
Impact on fixed-rate mortgages
If you're waiting for a lower fixed-rate mortgage rate to make your move to buy a house, watching the Fed may not necessarily pay off. But if you already have a fixed-rate mortgage, refinancing when interest rates decline can save you money, provided the timing is right.
Mortgage providers charge fees and closing costs for refinancing, so it can take years to recoup the costs. However, refinancing to a lower rate can make sense if you plan to spend a long time in the house. A few considerations:
- When considering refinancing: Think about how much lower the new rate is and how long it will take to make up for the costs with the savings from the lower rate.
- If you have a fixed-rate mortgage and plan to stay: Refinancing at a lower rate can help you pay off your mortgage faster. If you maintain a similar monthly payment, a lower interest rate means more of your payment goes toward the principal and less toward interest, which can shorten the time left on your mortgage.
- If you have a fixed-rate mortgage and plan to move: If you have a fixed-rate mortgage and plan to move soon, you might consider switching to a lower, adjustable-rate mortgage. This can save you money if you plan to sell the house before the adjustable rate goes up.
Impact on variable-rate mortgages
Variable-rate mortgages, also known as adjustable-rate mortgages (ARMs), have interest rates that fluctuate with market conditions. Many ARMs start with a fixed interest rate for a certain time frame. After that, the rate changes regularly based on the current market rates.
- If you have an ARM: If you currently have an ARM, you might consider refinancing into a new ARM with a lower interest rate. Or you could switch to a fixed-rate mortgage to lock in a more stable and predictable interest rate, especially if you expect rates to rise in the future.
- If you want an ARM: Variable-rate mortgages do not guarantee future rates and payments, so they're not for everyone. If you choose an ARM, keep in mind that while falling interest rates could reduce your costs, rising rates could increase your monthly payments significantly.
How Interest Rates Can Impact Credit Cards and Loans
When the Federal Reserve changes interest rates, it can affect the rates on credit cards and loans, with credit cards often being impacted the fastest.
For example, if your credit card has a 9.75% annual percentage rate (APR) and the Fed raises rates by 0.25%, your APR could increase to 10%. Credit card companies usually set your rate based on your credit history and the market interest rates.
Other loans, like new auto loans or student loans, may also see their interest rates rise or fall based on changes to the federal funds rate. While fixed-rate loans won't change, adjustable-rate loans and new loans are more likely to reflect current market rates.
Interest Rates and Your Finances
No matter what stage you're at in life, a drop in the interest rate can present opportunities or challenges—perhaps even both. By closely tracking the rates you're paying on your debt and the rates you're earning on your savings, you can make the most of any change in interest rates throughout your life.
If you want to lock in the best rates for your CD accounts before rates drop, learn about Synchrony Bank CDs here.
READ MORE: Fixed vs. Variable Interest Rates: What's the Difference?
