Things to do with your cash when interest rates drop

The last time the Federal Reserve Board reduced interest rates was in 2020. We're all aware with what transpired in the years since: mortgage rates rose, loans became prohibitively expensive, and banks, fighting for our cash, jacked up the APY on savings accounts to unbeatable levels (6%!).

The period between 2020 and 2024 was marked by significant economic challenges, including the aftermath of the COVID-19 pandemic, supply chain disruptions, and inflationary pressures. These factors contributed to the Federal Reserve's decision to maintain higher interest rates as a tool to combat rising inflation and stabilize the economy. The resulting high-interest environment had far-reaching effects on various sectors, from real estate to consumer spending, shaping the financial landscape that we've become accustomed to in recent years.

Now that the Fed dropped rates by 50 basis points at its September meeting, we're in a position we haven't seen in a long time. What should we expect when interest rates fall? Business Insider's personal finance team breaks it down.

Your mortgage rates.

Expect mortgage rates to continue to fall.

Act: Mortgage rates were far lower before the Fed began decreasing rates, so you might save a lot of money on a mortgage now compared to a year ago. Looking ahead, the Fed is likely to lower rates several times this year, and possibly even more in 2025, implying that mortgage rates will continue to fall. You might want to wait before beginning the home-buying process.

The same goes for refinancing. More homeowners began refinancing in recent weeks as mortgage rates decreased in anticipation of a Fed cut. Borrowers who obtained their mortgages when interest rates were higher may be able to reduce their monthly payments by refinancing, but whether it is worthwhile to refinance now is determined by factors other than rates.

It's important to note that while falling mortgage rates can make homeownership more accessible, they can also stimulate demand in the housing market. This increased demand could potentially lead to rising home prices, especially in desirable areas. Prospective homebuyers should consider this dynamic when deciding whether to enter the market immediately or wait for further rate drops. Additionally, those considering refinancing should carefully weigh the costs associated with the process against the potential long-term savings to ensure it's a financially sound decision.

Your savings rates.

Expect savings account and CD rates to fall.

Act: In recent years, we've witnessed eye-popping APYs on high-yield savings and CDs, but earning 5% or 6% APY is likely to come to an end. To continue receiving high-interest yields on your investments, financial advisors advocate locking up CDs for maturities of less than a year while interest rates remain high. Remember, high-yielding money market and savings accounts continue to outperform normal bank accounts even as interest rates fall.

Your Investments

Expect short-term volatility that won't have an impact on long-term strategies.

Act: Amid adverse market sentiment about a future recession, financial advisers warn investors not to respond to prospective interest rate decreases and to avoid panic selling. A diverse portfolio of assets reduces risk from short-term market swings.

Now is a good moment to reassess your investing plan, particularly cash holdings, which are likely to drop. Bond prices are projected to climb, so consider fixed-income investments to mitigate risk and keep portfolios balanced.

As interest rates fall, investors may notice shifts in various asset classes. Historically, lower interest rates have been favorable for stock markets, potentially leading to increased corporate profits and higher stock valuations. Real estate investment trusts (REITs) and dividend-paying stocks may become more attractive to yield-seeking investors. However, it's crucial to maintain a long-term perspective and not make drastic changes based solely on interest rate movements. Consulting with a financial advisor can help ensure your investment strategy remains aligned with your goals and risk tolerance in this changing economic environment.

Your credit card debt.

Expect more of the same.

Act: Credit card APRs are loosely based on Federal Reserve rates. But a Fed rate drop will not help you get out of credit card debt anytime soon. In the article linked below, four consumer finance professionals explain why and offer recommendations on debt management options you can use to achieve financial stability.

Compare Personal Loan Rates.

While credit card interest rates may not immediately reflect the Fed's rate cut, the lower interest rate environment could present opportunities for those struggling with credit card debt. Personal loans, which often have lower interest rates than credit cards, may become more affordable and accessible. This could provide a viable option for consolidating high-interest credit card debt into a single, lower-interest loan. Additionally, some credit card issuers may eventually adjust their rates or offer more competitive balance transfer promotions in response to the changing interest rate landscape. Consumers should stay informed about these potential opportunities and consider seeking advice from financial professionals to develop a comprehensive debt reduction strategy.

The bottom line: Unless you're a financial professional, you generally don't need to make rapid — or even any — changes to your money simply because interest rates have plummeted. However, if you've been thinking about getting a mortgage, investing in CDs, or consolidating your debt, now is a fantastic time to start looking into your alternatives.