The Economic Impact of a Pandemic

The effects of the COVID-19 outbreak reach far beyond the face masks, social distancing, and the impact on your daily commute. By now you will have heard about the Fed slashing rates in response to the pandemic, but what does it mean? I’ll break it all down for you in layman's terms (because let’s face it, this stuff is confusing!)

What you need to know

The rate we are talking about is called the Fed Funds Rate. This rate serves as a benchmark for other financial institutions in determining the interest rates they will charge other financial institutions on an overnight basis. Foreseeing an economic crisis, the Fed cut the Fed Funds Rate by a full 1.50% last month. This move spurred a flood of refinance and mortgage applications by consumers looking to cash in on historically low rates.

So why aren’t homeowners across the country basking in the glory of 0% mortgage rates? Simple. While the Fed Funds Rate may influence mortgage rates, it does not determine them. Mortgage rates are determined by the price of mortgage-backed securities. You might ask yourself, why do we care about the Fed Funds Rate? Good question. While it will not play a role in long-term loans, it DOES affect shorter-term loans. If you are looking for a short term loan (and you have job security), now would be a good time to pursue it at today’s favorable rates. Take a look at your variable-rate credit cards, lines of credit, or equity lines to see what I am talking about. Notice that I said equity...if you have been meaning to do some home improvement projects and find yourself at home more, you’ll reap the financial rewards.

As far as mortgage rates are concerned, you can and still should consider a purchase or refinance if the rate is favorable. For instance, if you’ve been in your home for many years and your credit has improved to the point where you would qualify for a significantly lower rate, go for it! Likewise, if you’ve already begun the process of house hunting, there’s no reason to stop now (presuming you have the aforementioned job security).

A note about money and COVID-19

Most Americans will be receiving stimulus checks in the upcoming weeks. Obviously, putting food on the table and paying bills is the top priority, but if you are in the position to save it, I encourage you to do so. The same is true if you are cashing in on equity in your home. Necessary repairs and upgrades are important, but if you have anything left over, now is not the time to splurge.

It's also a time to remain cautious about fraud. Fraudsters are sending phony stimulus checks to people – don’t fall for it. The IRS is leaning towards direct deposit over mailing physical checks. Even if you have to receive a paper check, there is a significant delay, and those checks may not start going out to the public until August. Receiving a check early is a key indicator of fraud. It is also important to note that a legitimate check will not be written for an odd amount, and you will not be asked to verify the funds by visiting a website or calling a phone number.

Never provide your personal information in an email, phone call, or other communication to anyone claiming to be from the Treasury Department. Instead, read more information about stimulus check fraud.

Don’t forget to read my other posts about scams (here and here.)

What did you think of this post? Did you have anything to add? Feel free to comment below, or email me directly.

Krista Kyte is a personal finance blogger and personal banker with over 17 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.