Who Are The Best CRE Lenders After Rate Cuts?

Nov 20, 2024 • 10 min read

Understanding the Impact of Lower Rates on Borrowers, Savers, and the Economy The Federal Reserve, acting as the nation's central bank, wields significant influence over the economy through its ability to adjust short-term interest rates. On November 7, the Fed announced a 25 basis point (0.25 percentage point) cut to the federal funds rate—a move widely anticipated by economists and market watchers. While such a rate cut is designed to stimulate economic activity, it doesn't affect everyone equally. Some stand to gain, while others may find themselves at a disadvantage.

What Does a Fed Rate Cut Mean?

The federal funds rate is the interest rate at which banks lend money to each other overnight. This rate serves as a benchmark for various other interest rates across the economy, impacting everything from mortgages to credit cards to savings accounts. When the Fed lowers this rate, it aims to encourage borrowing and investment by making it cheaper to access capital.

"When economic conditions are slowing and unemployment is rising, the Fed typically begins lowering rates," explains Dwayne Safer, an associate professor of finance at Messiah University in Pennsylvania. Lower rates reduce borrowing costs for consumers and businesses, potentially leading to increased spending and investment.

Winners: Who Benefits from Lower Rates?

1. Borrowers with Variable-Rate LoansIf you have a variable-rate loan—such as an adjustable-rate mortgage (ARM), a home equity line of credit (HELOC), or certain student loans—you might see a decrease in your interest payments. For example, if you've drawn $250,000 from a HELOC at an 8% interest rate, your monthly interest payment would be about $1,667. A 0.25% rate cut could reduce your payment by approximately $52 per month.
2. Credit Card UsersCredit cards often have variable interest rates tied to the prime rate, which is influenced by the federal funds rate. A rate cut can lead to lower interest charges on outstanding credit card balances. While the reduction might seem small—about $2 less per month on a $10,000 balance—it can add up over time, especially for those carrying significant debt.
3. Investors in the Stock MarketHistorically, stock markets respond positively to lower interest rates. According to Robert Johnson, a finance professor at Creighton University, from 1966 through 2023, the S&P 500 index averaged a 16.4% return in years when the Fed lowered rates, compared to 6.2% when it raised them. Lower rates make equities more attractive relative to fixed-income investments like bonds, potentially boosting stock prices.
4. Prospective HomebuyersWhile fixed mortgage rates are influenced by a variety of factors—including the 10-year Treasury note and investor demand for mortgage-backed securities—a Fed rate cut can lead to slightly lower mortgage rates over time. This makes home loans more affordable for new buyers.

Losers: Who Might Be Adversely Affected?

1. Savers and RetireesThose relying on interest income from savings accounts, certificates of deposit (CDs), or money market accounts may see their yields decrease. For savers who have enjoyed higher interest rates in recent years—sometimes over 4.5%—a rate cut means lower returns on their deposits. Retirees living off fixed incomes may find their earnings diminished, impacting their financial security.
2. Banks and Financial InstitutionsBanks can experience a squeeze on their profit margins when rates fall. If a significant portion of a bank's assets are in floating-rate loans, a rate cut reduces the interest income from those loans. While banks can adjust the rates they offer on deposits, they may not fully offset the decline in loan income, affecting overall profitability.
3. Fixed-Income InvestorsInvestors holding government bonds, such as Treasury bills, may see lower yields following a rate cut. David Kass, a clinical professor of finance at the University of Maryland, notes that a 0.25% rate reduction could cost Treasury bill investors $250 per year on a $100,000 investment.

Navigating the Changing Financial Landscape

With rates on the move, consumers and investors might wonder how to make the most of the situation.

• Borrowers: If you have variable-rate debt, consider using the reduced interest payments to pay down your principal faster. For those with high-interest credit card debt, this might be a good time to explore balance transfer offers or consolidation loans at lower rates.
• Savers: Shop around for financial institutions offering competitive rates. Online banks and credit unions sometimes provide higher yields on savings accounts and CDs, even when rates are falling.
• Investors: Diversify your portfolio to balance the risks and opportunities presented by changing rates. Sectors like autos, apparel, and retail have historically performed well in low-rate environments, while utilities and financials may lag.

Best Lenders in a Lower Rate Environment

As rates decrease, some lenders become more attractive due to their favorable terms:

• Mortgage Lenders: Institutions like Rocket Mortgage, New American Funding, and NBKC Bank may offer competitive mortgage rates. With minimum down payments starting as low as 1%, borrowers with credit scores of 620 or higher might find advantageous loan options.
• Credit Card Issuers: Look for credit cards with low annual percentage rates (APRs) to save on interest if you carry a balance. Some issuers may offer introductory 0% APR periods, which can be beneficial for transferring balances or making large purchases.

Conclusion

A Federal Reserve rate cut is a powerful tool that can stimulate economic activity by lowering borrowing costs. While it offers benefits to borrowers and can boost the stock market, it also poses challenges for savers and financial institutions. Understanding how these changes affect your personal finances can help you make informed decisions—whether it's taking advantage of lower interest rates to refinance debt or seeking out higher-yield savings options in a shifting economic landscape.