There’s a silver lining in the economic anxiety Americans face: Interest rates are at unprecedented lows and benchmark bond yields have dropped below 1% for the first time in history, conditions that are expected to cut borrowing costs even further on everything from mortgages to student loans.
The Federal Reserve lowered borrowing costs to near zero Sunday in an emergency move to combat the economic shocks from the coronavirus pandemic. Meanwhile, the 10-year Treasury yield, a key benchmark that influences borrowing costs on houses and auto loans, slumped further to historic lows this month as virus fueled worries stoked fears of an economic slowdown.
But experts say borrowers are poised to benefit from the combination of lower rates and a drop in bond yields in the coming months.
Mortgage rates have dropped to historical lows as bond yields have fallen, a move that could help first-time homebuyers and those looking to refinance. When Treasury yields fall, banks charge lower interest rates for mortgages.
The Fed’s key short-term rate affects 30-year mortgages and other long-term rates indirectly. The average fixed rate for a 30-year mortgage rose to 3.36% last week, up slightly from an all-time low of 3.29% the prior week, according to Freddie Mac. That’s almost a full percentage point lower than 4.31% a year ago.
“This is the time to refinance,” says Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group.
A drop in yields can also affect the interest rates on student loans. For Americans who are headed to college next fall and weighing their financial aid offers, it’s important to separate scholarships from loans that have to be paid back, experts caution.
“Once you take out a federal student loan, the interest rate is fixed for life,” says Robert Humann, general manager at Credible, an online loan marketplace. “But many families don’t realize that you’ll have different interest rates on the loans that you take out each year you’re in school, which can make it hard to get a handle on what your monthly payment and total repayment costs will be.”
If the yield on the 10-year Treasury fell all the way to zero, new loans to undergraduates would be 2.05%, graduate students would pay 3.6%, and the rate on parent PLUS and grad PLUS loans would be 4.6%, according to Humann.
On Friday, the 10-year Treasury yield settled at 0.946% after falling as low as an all-time low of 0.318% earlier this month. As long as it stays below 2.48% on May 12 — last year’s benchmark — rates on federal student loans taken out for the 2020-21 academic year will go down on July 1, Humann said.
Credit card holders probably won’t immediately feel the impact of the Fed’s latest move to bring rates down to zero because these rate reductions tend to be passed along within a couple of billing cycles, experts say.
For someone with $6,000 in credit card debt, Sunday’s move alone can end up saving them a little less than $200 in interest, according to Matt Schulz, chief industry analyst at CompareCards.
“While this is certainly welcome news for those with card debt, other moves would be far more helpful for those struggling with cash flow in the wake of the coronavirus,” Schulz said. “Perhaps the best thing banks could do is allow cardholders to miss a payment or two during this time of crisis without fear of late fees, credit damage or interest accruing. That would be a really big deal.”