Now might be a great time to lock in interest rates on a loan.

The Federal Reserve (Fed) just cut interest rates by a quarter percentage point. It was the second consecutive drop since late July as the Fed tries to protect the U.S. economy from slowing growth
worldwide and rising political risks. The Fed’s policy interest-rate target is now 1.75 to 2%.

So the question is should I lock in long term or let the rate float up or down as the market dictates? The answer depends of what kind of loan you want.

For a mortgage, you could lock in at a historically very favorable rate on a 15-year to 30-year loan; or choose an adjustable-rate loan that provides a fixed interest rate for an initial term of five to seven years, then adjusts to a new rate for the duration of the loan; or select a floating-interest rate where the rate goes up or down, depending on what happens in the treasury markets.

For small businesses and others using lines of credit for working capital, interest rates can also be either fixed or variable. But the loan’s maturity date is usually one to two years, so the difference between the two rates is usually marginal.

However, if a business wants to finance its operating premises, then longer-term financing makes sense. In this case, rates depend on whether the borrower is a sole proprietor or an entity, such as a corporation, a partnership or a limited-liability company.

Unlike home mortgages, there is no secondary market for small business mortgages, so these loans stay on the originating bank’s books. Many lenders try to limit exposure to interest-rate volatility by offering rates fixed for five to seven years on a 10-, 15- or 20-year maturity. The rate then is adjusted up or down depending on market movements for a new time period.

Related Articles

See All

Dollar Shortage Causes Bank Funding Stress

November 7, 2019
1 min read
Brief: Banking, Financial Markets & Investing
Read More

Worried About Identity Theft? Freeze Your Credit Report

August 15, 2019
< 1 min read
Brief: Banking, Wealth Management
Read More

Finding Financial Security in the Gig Economy

March 21, 2019
< 1 min read
Brief: Banking
Read More

Get the latest in Research & Insights

Sign up to be notified of the latest Research & Insights from AMG National.