4 things to do with your money now, while interest rates are low
- The Federal Reserve slashed interest rates yet again on October 30, marking the third rate cut since late July.
- To take advantage of the low Fed funds rate, now is a good time to consider consolidating credit-card debt and refinancing student loans.
- Despite lower interest rates on savings accounts, it's always a good time to store money in a high-yield savings account.
- Also, mortgage rates on fixed-term loans are low compared to last year, so it could be worth refinancing your mortgage to save money on interest payments.
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The Federal Reserve slashed interest rates yet again on October 30, marking the third rate cut since late July.
A lower federal funds rate essentially drops the earning potential on savings accounts, but makes borrowing money cheaper. Now is a good time to be strategic about paying off your debt and where you save your money.
Here are a few things you can do while interest rates are low:
1. Consolidate credit-card debt
When the Fed cuts its benchmark rate, borrowing money becomes cheaper.
It's never recommended to take on high-interest debt just because it's cheaper than it used to be, but if you're currently paying off credit-card debt and have ever considered consolidating it - i.e. taking out a personal loan at a lower rate and using the cash to pay off your balance - now is probably the right time to do it.
Federal Reserve data shows that borrowers who were charged interest on their credit-card debt paid an average of 16.97% in the third quarter of 2019, Credible's Matt Carter reported. Meanwhile, the average rate on personal loans during that time was 10.07%. That's the largest spread in more than 20 years of Federal Reserve records, Carter reported, making it a great time to take advantage of savings on interest.
Since consolidation requires taking out a personal loan, you'll still have a monthly debt payment to make but it will likely be less than your credit-card payments and your interest rate will be fixed. If you're juggling multiple credit-card balances, this can be a good strategy to streamline your monthly payments into a single bill.
2. Refinance your mortgage
While mortgage rates aren't closely tied to the Federal funds rate, they are down since last year, making it a good time to consider refinancing to lock in a lower rate.
The interest rate on a 30-year fixed-rate mortgage averaged 3.78% as of October 31, compared to 4.83% one year ago, according to Freddie Mac. Average rates on 15-year fixed-rate mortgages are even lower at 3.19%, compared to 4.23% at this time last year.
Depending where you're at in the life of the loan, how much you owe, and whether you credit is in good shape, refinancing your mortgage could save a ton of money in interest payments and even help you pay off your mortgage early. Bear in mind that you will pay fees equal to about 2% to 4% of the principal loan amount to refinance.
3. Refinance your student loans
After hitting a post-recession peak last year, interest rates for student loan refinancing fell to a 12-month low in September, after the second Fed rate cut in as many months, Credible reported. If you're holding on to a high interest rate on your loans from college, it could be worth refinancing.
Student loan refinancing is when a private lender pays off your existing loan and gives you a new loan with a lower interest rate. You can refinance both federal and private student loans, but you'll lose benefits like income-driven repayment if you refinance your federal loans.
You can refinance to today's lower rate and stick with it for the next several years through a fixed-rate loan, or go with a variable rate loan where the rate follows an index interest rate, such as the prime rate.
Keep in mind that in order to get the lowest possible interest rate, you generally need to have a very good or excellent credit score.
4. Open a high-yield savings account
Over the past three months, many high-yield account APYs have fallen from highs of over 2.5% to below 2%. But the rates on general savings accounts and checking accounts have dropped too, making them an even worse deal than usual. Right now, the average general savings account earns 0.09% in interest and most regular checking accounts earn 0.01%.
Lower interest rates may not be ideal for growing your savings right now, but there's still no better place to store money you need in the short-term than a high-yield savings account. These accounts keep your money safe from market risk and within arm's reach whether you're building up an emergency fund or saving for specific goals.
The best high-yield savings accounts still impose no monthly fees and have low minimum balance requirements. Plus, when interest rates inevitably go back up, you'll see a greater return on your money than if you started from scratch.
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