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What does the Fed's pause in interest rate hikes mean for borrowers and savers?


For many people, it's welcome news that the Federal Reserve is hitting the pause button on rate hikes, at least for now. Now, that may mean some relief for people with a mortgage, auto loan or credit card balance. But what does it mean for your savings account? Here to help us sort this out is Chelsea Ransom-Cooper. She's a managing partner and certified financial planner with Zenith Wealth Partners. Chelsea, mortgage rates still relatively high right now - average rate about 7% according to Bankrate. What impact will the Fed's decision have on mortgage rates going forward?

CHELSEA RANSOM-COOPER: So when we look at mortgage rates, specifically what we're seeing is they are fixed pretty close to where treasuries are. But there is still volatility, depending on the loan volume that banks are experiencing right now. Due to the Fed's pause in rate hikes, even though they are talking about potentially raising it two more times before the end of the year, we are really seeing this cause a change in credit cards and variable rate loans. So that's personal loans, and then that also includes those home equity lines of credit that quite a few people did open over the past few years. So it's important to understand, what are all the types of loans that you have as part of your financial picture and then how are those impacted as well?

MARTÍNEZ: So should people go out to open houses this weekend and put their real names down, like they're serious to buy a house?

RANSOM-COOPER: (Laughter) You know, it really always comes back to your financial goals and where you are. If you were always planning to purchase a home, it still makes sense for your financial future. You can afford the down payment and you're seeing a home that really makes sense for you and your family - of course, you should always still continue. Personal finance is personal, and making a home decision depends on more than just where interest rates are. It really depends on how much you can afford to cover on that monthly payment, but also on that down payment as well. So with the interest rate pause, it can be an attractive time where people are saying, OK, this is a little bit of a relief, but understanding we're not out of the woods yet since we are expecting to see potentially two more hikes before the end of this year.

MARTÍNEZ: What about the money that banks pay their customers, things like savings rates in - for savings accounts? Will we see - continue to see increases there?

RANSOM-COOPER: You're asking a great question. So when we think about savings rate, it also depends on where you're banking. So if we think about those big brick-and-mortar banks, they typically have very, very low savings rates. And the reason for this is because of the overhead cost that they have to cover. Think about it. You see those big brick-and-mortar banks on every single corner, and that comes with a cost, where those savings rates are not increasing over time. Where if you look at online banks that don't have that overhead cost, they can continue to increase their savings rates over time where they're consistently over 4% right now.

Right now, we're seeing that they're sticking to where they are, but they're a very attractive place to hold your savings if you're looking for something that can yield a little bit more than that 0.01% at that brick-and-mortar. But also, this is your emergency savings. You want to keep it safe. You want to have access and liquidity to it. So that's where those online banks that are still getting over 4% can be incredibly attractive.

MARTÍNEZ: So still a good time to shop those savings accounts to smaller banks.

RANSOM-COOPER: Absolutely, and then also understanding when you will potentially need that money. So having that high-yield savings is great, but also, it can still be attractive to look at shorter duration, CDs or Treasury bills as well - if you know that you have excess cash flow, then what you would need for your traditional 3 to 6 months emergency savings.

MARTÍNEZ: I was just about to ask about that, yeah, because how do you know, like, how to plan for that? I guess you don't if it's an emergency, right?

RANSOM-COOPER: You don't really know how much your emergency will be, but we say a good rule of thumb is, you know, keeping 3 to 6 months. And especially with the volatility in the market and the layoffs, it's really best to hold closer to six months. And then once you have that, any excess cash that you have that you feel like you may need in, let's say, 2 to 5 years, you're not comfortable putting it in the market, look to some of these shorter duration options where you can lock it in and just get a little bit more yield than you would by investing or leaving that money in a brick-and-mortar bank.

MARTÍNEZ: So I guess, in short, it's kind of a good time right now if you have money that you don't need to spend on something. If you got money that you can invest, it's a good time to have it.

RANSOM-COOPER: It's an excellent time to have that. The challenge, though, is since a lot of people are leaning on credit cards right now, they don't necessarily have a lot of cash flow. But if you are one of those individuals that do, then it is a great opportunity and a great time to use that high-yield savings.

MARTÍNEZ: Chelsea Ransom-Cooper is a managing partner and certified financial planner with Zenith Wealth Partners. Chelsea, thanks.

RANSOM-COOPER: Thank you. Transcript provided by NPR, Copyright NPR.

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