This article originally appeared in Aldrich Community, a client experience offering from Aldrich Wealth.

Since the Federal Reserve’s (Fed) rate hike campaign began in March 2022, interest rates have been the center of attention. From Wall Street to the family next door, everyone has felt the pressure of rising rates as the Fed tightened the screws on the economy to slow inflation.  

One of our clients recently shared concern for her son and daughter-in-law. Through hard work and commitment to saving, they squirreled away enough funds for a down payment on their starter home last year. While they love life as homeowners, with an interest rate near 8% for their mortgage, they’ve struggled to meet the burden of their debts while still saving for the future. 

Although we never advocate for spending beyond one’s means, we were able to give our client insights to share with her children. Since late last year, the Fed has continued to tease potential rate cuts in 2024. Rate cut environments offer benefits to borrowers like our client’s son as well as investors. In anticipation of future rate cuts, below are some opportunities that falling rates bring, so you and your loved ones can take full advantage when the time is right.   

When the Fed ultimately cuts interest rates, longer-duration securities will likely experience a more drastic decline in yields since they are more interest-rate sensitive. With the Fed indicating rates are likely at or near their peak, investors looking for low-risk returns should consider locking in current interest rates on Certificate of Deposits (CDs) and Treasuries now, potentially extending the duration to take advantage of the higher rates we see today. Returns on other low-risk investments such as money markets and high–yield savings accounts fluctuate with applicable market rates, so investors will see returns decline in these investments as the Fed cuts rates. 

In a rate cut environment, borrowers may be able to replace their existing loans with new loans boasting better rates. Refinancing can lead to lower monthly payments and reduced interest over the life of the loan, leaving more room in the monthly budget for other expenditures or savings. There are often applications, approvals, and closing costs involved with refinancing, similar to the initial lending process, so cost-benefit analysis should be done to ensure the interest savings outweigh the cost of refinancing. 

Individuals with multiple lines of credit at high interest rates, for example, credit cards, student loans, or auto loans, might consider consolidating debt into one lower-rate loan instead of separately refinancing multiple credit lines. 

For those in the market for a new loan, variable rate loans may be worth considering. Let’s take adjustable-rate mortgages (ARMs) for example. ARMs begin with an introductory rate for a set amount of time, typically at a lower percentage than fixed mortgages. At the end of the introductory period, the interest rate becomes variable, periodically adjusting to prevailing rates. In a falling rate environment, borrowers will not only benefit from the lower initial monthly payments but may also see their interest rate and monthly payments decrease during subsequent adjustment periods. ARM holders can also refinance during the initial fixed rate period to lock in a rate once they are comfortable with the prevailing rates. 

How soon these highly anticipated interest rate cuts will occur remains to be seen, but it’s important for investors and borrowers alike to be prepared to seize opportunities when rates ultimately come down. If you have questions about how a falling rate environment will impact you or your loved ones, the Aldrich Wealth team is here to help.