The Federal Reserve on Sunday made two emergency moves that could help Americans save money on loans.
The central bank cut its key benchmark rate to zero and ramped up its purchases of Treasuries and securities backed by mortgages. This is the second rate cut this month in an effort to stem a growing financial crisis due to the global outbreak of coronavirus.
The short-term rate will help those with credit card debt and homeowners borrowing against their home equity, while low yields on the 10-year Treasury could help homeowners, buyers, and student loan borrowers.
Savers, though, are out of luck.
“If money is a product and the interest rate is the price of money, it’s like money is on sale,” said Tendayi Kapfidze, the chief economist at LendingTree. “It’s like the Black Friday for money.”
Credit card rates are pegged to the prime rate, which moves in tandem with the federal funds rate, which the central bank slashed on Sunday. While it may take two or three statement cycles for the rate reduction to show up, the full effect might be a decline of 1.5 percentage points.
“For someone with $6,000 in credit card debt, today's move alone can end up saving them a little less than $200 in interest,” said Matt Schulz, chief industry analyst at CompareCards. “That may not change people's lives, but it is significant savings."
The yield on the 10-year Treasury (^TNX) is hovering below 1%, an unprecedented level, as coronavirus fears grip investors. The rate on the most popular home loan — the 30-year fixed mortgage — is priced off the 10-year Treasury yield, usually about 1.75 percentage points above it, said Mike Schenk, the chief economist for the Credit Union National Association.
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“That’s the big one,” he said.
Earlier this month, the rate on the home loan hit an all-time low of 3.29%, according to Freddie Mac, sending homeowners scrambling to refinance. About 80% of households could have lowered their mortgages by a half-percent, according to Michael Fratantoni, chief economist at the Mortgage Bankers Association.
The number of refinance applications jumped 79% in the first week of March to the highest level since April 2009, according to the Mortgage Bankers Association, with the volume almost six times higher than the same week a year ago. The jump was also the largest week-over-week gain since November 2008.
The problem now is that many lenders can’t keep up with the number of refinancings, affecting the rates they are offering.
“Right now, lenders are inundated and credit markets are particularly tight,” said Greg McBride, chief financial analyst at Bankrate. “Until those situations both ease, lenders are going to hold off on cutting rates in a substantial way.”
Read more: Refinancing mortgages: The full breakdown
Lower mortgage rates could also help buyers in the market. For instance, if you borrowed $200,000 at a 4.5% rate, you’d have a $1,013 monthly payment. But at 3.5% rate, you could borrow up to $225,000 for nearly the same payment.
Home equity lines of credit, or HELOCs, are also pegged to the prime rate, meaning rates on existing balances will be falling in concert. The two rate cuts would decrease the monthly payment on a $30,000 home equity line of credit with $37 a month.
“Borrowers that take out lines of credit in the future are not likely to find the terms to be as generous,” said McBride said. “Lenders are going to be very careful about risk.”
Lenders may they trim credit lines for credit cards and home equity lines in order to protect themselves from an expected increase in delinquencies and default.
If the 10-year remains in free-fall until May, student loan borrowers may get a break. That’s because rates for federal student loans — including graduate and parent loans — are set in May at the last auction for 10-year Treasuries, said Travis Hornsby, a chartered financial analyst and founder of Student Loan Planner.
For students borrowing for the 2020-21 school year, they could get significant savings in interest if rates stay at these levels until the auction.
Undergraduates may get loans at 2.7% versus 4.53% now. Grad school students may see a 4.3% rate instead of the current 6.08%; and parents and grad students could get PLUS loans at 5.3% compared with 7.08% now, Hornsby said.
“It would save billions of dollars in interest,” he said.
Some private refinance loans for student debt also are tied to the 10-year Treasury yield, Hornsby said, so those rates also may go down.
Auto loans are not as interest-rate-sensitive because there’s strong competition among lenders, according to McBride. A 1% difference would make a prospective car payment on a $25,000 loan about $12 less a month.
“I do expect auto loan rates will fall,” McBride.”But that's not something that translates into significant savings.”
Savers need to readjust
The rate cut will bring savings rates back down to levels seen between 2010 and 2015, McBride said. A lot of banks are going to pay next to nothing in savings accounts and certificates of deposit, he said. Even the top yielding accounts will likely settle around the 1% mark.
“There’s going to continue to be an advantage to shopping around, seeking out things like online savings accounts,” McBride said, “which will continue to pay better yields than what most banks are paying.”