These loans will become cheaper as the Fed cuts rates

With inflation finally waning and the employment landscape shifting, the Federal Reserve finally opted for a cut to its federal funds rate this month. According to forecasts, there could be more to come, too.

While this is bad news for savers (rates on savings accounts and certificates of deposit will certainly decline), it's great news if you need to borrow money. After all, a few different types of loans will likely become cheaper as the Fed continues to cut rates over time. Here's what you can expect. 

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These loans will become cheaper as the Fed cuts rates

These loans could get more affordable as the Fed makes its moves this fall.

Personal loans

Interest rates on all borrowing products will drop as the Fed lowers rates, including personal loans. Because personal loans tend to have fixed rates, it will largely be new personal loans that are more affected, though.

If you have a personal loan with an adjustable rate — which is less common, but still possible — then you'll see a lower rate and payment shortly after a rate cut goes through. 

"Variable-rate loans will adjust but it may be a month or more before the change is seen in existing loans," says Jay Zigmont, a certified financial planner and founder of Childfree Wealth. "Your loan documents specify when rates are adjusted, with some being monthly, others quarterly or longer."

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Home equity lines of credit (HELOCs)

HELOCs almost always come with variable interest rates that are based on the prime rate — which the Fed's rate directly determines. So when the Fed rate changes, HELOC rates tend to change, too (as do other variable-rate products, like credit cards).

"As they cut the federal funds rate, you will see a direct correlation with HELOC and credit card interest rates," says Mike Hardy, managing partner at Churchill Mortgage.

This goes for both new and existing HELOCs, Hardy says. Lenders will typically adjust their pricing on new HELOCs immediately, and those with HELOC loans will see their rates will adjust shortly after.

"Credit card and HELOC rates will have frequent adjustments and move quickly, as there is a quick pass-through effect," Hardy says. "You can expect to see this adjustment on the next billing cycle after a Fed rate cut."

Home equity loans and mortgages

On longer-term, fixed-rate products like home equity loans and mortgages, rates will drop, too — at least on newly issued ones.

With these products, rates tend to drop ahead of Fed rate cuts, as the market begins to price the Fed's expected policy changes in. 

"The market is forward-looking," Hardy says. "Just as an investor will buy a stock because they expect positive earnings from a company in the future, that investor will not wait until the official company announcement to buy a stock. There is a famous saying among investors: 'Buy the rumor, sell the news.' Often, the majority of the movement will come before an official announcement, followed by minor reverberations after an announcement."

This happened with 30-year mortgage rates in the weeks leading up to the Fed's September rate cut. In between the July Fed meeting and its most recent one, the average mortgage rate dipped from 6.77% to 6.15% — falling by more than 50 basis points.

"We just saw it on Wednesday with the Fed cutting interest rates by 50 basis points, but longer-term mortgage rates only improved by 7 basis points after the announcement," Hardy says. 

By the end of the year, Fannie Mae predicts the average 30-year mortgage rate will sit at 6.2% and then fall to 5.7% by the end of 2025.

The bottom line

Credit card rates are also poised for a fall as we close out 2024 — as much as 0.50%, according to Kristy Kim, the CEO of TomoCredit. It all depends on inflation, economic data and what the Fed decides to do with that information, though. For now, the central bank is expected to keep on with rate cuts this fall, with the fed funds rate potentially hitting 3.75% to 4.00% by year's end. If you're not sure how to best use these lower rates to your advantage, talk to a financial advisor. They can hep you make the smartest moves for your money.