Special Report: Four Ways the Fed Rate Cut May Impact You
Your Guide to the Housing & Mortgage Markets
The Federal Reserve controls the Fed Funds rate, the interest rate banks charge each other for borrowing short-term funds. The Fed Funds rate went down to 4.5% after the Fed cut rates on December 18, 2024. The Prime Rate is based on the Fed Funds rate. The Prime Rate is set by large banks and is often used to determine the interest rates on lines of credit, credit cards, and business loans (see below). The formula for Prime is Fed Funds Rate + 3. This means the Prime rate is currently 7.5%. Here are four ways the Fed rate cut could impact you:
MORTGAGE RATES
Mortgage rates fluctuate daily based on the supply and demand for mortgage bonds in the bond market. That's why, according to Freddie Mac data, mortgage rates dropped by over 1% throughout the summer of 2024, even before the Fed began cutting rates in September. Then, mortgage rates went up by over 0.5% during the fall of 2024 in response to strong economic data and Trump's win in the presidential election. Mortgage rates may remain elevated if inflation or government spending remains elevated.
HOME EQUITY LINES OF CREDIT (HELOCs)
Interest rates on home equity lines of credit (HELOCs) change whenever the Fed changes rates. That's because HELOCs are based on the Prime Rate, which went down to 7.5%. HELOCs are typically quoted at Prime + a certain percentage. For example, if your HELOC is Prime + 1, your HELOC interest rate would be 8.5%.
CREDIT CARDS
Interest rates on credit cards change whenever the Fed changes rates. That's because credit cards are based on the Prime Rate, which went down to 7.5%. Credit Cards are typically quoted at Prime + a certain percentage. For example, if your credit card is Prime + 10, your credit card interest rate would be 17.5%.
BUSINESS LOANS AND LINES OF CREDIT
Interest rates on business loans and lines of credit generally change whenever the Fed changes rates. That's because business loans and lines of credit are often based on the Prime Rate, which went down to 7.5%. Business loans and lines of credit are typically quoted at Prime + a certain percentage. For example, if your business line of credit is Prime + 3, your interest rate would be 10.5%.