When the Federal Reserve Board met in September and decided to start lowering the federal funds rate, it signaled a potential beginning to lower interest rates across the board — eventually. Although the federal funds rate does not directly impact , it does influence them, and with one more meeting coming this year, the chances that mortgage rates will be much lower in 2025 is nearly 100%.
That’s why it’s time to plan now — what will you do when they come? There are lots of ways to take advantage of those rate cuts, all of which can either save or make you money. Let’s walk through some of the best ways to take advantage of 2025’s lower interest rates so you can go ahead and start planning.
1. Refinance your mortgage
Let’s start with the obvious, because if the federal funds rate drops a whole percentage point in 2024, as the CME FedWatch tool predicts it will, you very well may do yourself a world of financial good to go ahead and refinance any mortgages you’ve gotten in the last couple of years.
The average rate for the 30-year fixed-rate mortgage peaked at 7.79% in October 2023, but even in fall 2022, it touched 7% more than once. If you bought your house in either of those windows, you’re especially well positioned to save a bundle with a refinance in 2025 when rates are expected to drop to a solid 6.0% or less.
The difference in principal and interest payments on a $350,000 mortgage when going from 7.0% to 6.0% is about $230 per month, or $2,760 per year. That’s not anything to sneeze at. Now is a great time to contact your favorite refinance lender — — to get on its radar. A lender will work with you to get a refinance that makes sense for your situation, even if it takes a few months to reach a rate that’s beneficial.
2. Consider a second mortgage
If you’re like me and are holding on to a super low interest rate from days gone by, you have probably felt kind of stuck when it comes to doing major upgrades that may require a second mortgage or HELOC. Every time I check those rates and the payment that would go with the amount of big stuff I want to do all at once, I am blown away by how close it is to my current mortgage payment for so much less money.
The good news is that as rates drop, those second mortgages are going to start making more sense for us. A lot of us have home equity, especially if we bought before COVID-19, we just can’t make the numbers work, even if, like in my case, it would translate into significant energy savings every month.
Just like with refinance mortgages, this is a good time to start shopping around, since you want to be ready when rates drop into the range you’re shopping for. That might mean you have to boost your credit or pay down some debt, which can take time.
3. Use your equity to invest in real estate
Real estate you can lease out, be it another home, a duplex, or even a small accessory dwelling unit (ADU) you can rent as a short-term rental can be a good income stream if you’re made of the right stuff to be a landlord. If you’ve owned your home for five years or more, you’re likely to have plenty of equity to borrow against as a down payment on a rental property or to just completely build an ADU from scratch.
The thing with rental units is that you need cash flow, so the lower the interest rate, the better off you’ll be — and the more money you can make. You have to be able to pay for the water heater when it breaks or to replace the air conditioner when it’s on the fritz, so paying too much in interest isn’t helping you turn that property into an income stream. But with lower interest rates come bigger possibilities.
If you’ve always wanted to be a landlord, or even if you just want to build an apartment for your college kid to rent, , so you know when it’s time to make a move.
Lower interest rates are coming — get ready
Lower interest rates are on their way, though it’s hard to predict when they’re going to actually be here. I’d expect to see things start to move after the holidays, as demand for mortgages increases seasonally. You can get ready for them today by checking your credit score, paying down credit card debt, and talking to a lender to see what else you may need to do to be the best candidate possible.
