Wall Street types generally anticipate the Federal Reserve rate cut decision with the kind of fervor usually only seen in five-year-olds on Christmas Eve. But when cuts to the federal funds rate do occur, you may wonder what all the build up was about. A Fed rate cut certainly doesn’t represent a gift for all Americans, but conventional wisdom says that many folks can give a little thanks when interest rates are cut. Here are seven ways a rate cut could affect you:
1. Interest rates on home equity lines of credit will drop
The interest rate on home equity lines of credit are usually tied to the prime rate. The prime rate is tied to the federal funds rate, so Tuesday’s cut should result in a drop in home equity line of credit rates.
2. Relief for some borrowers with ARMs
An estimated $50 billion worth of adjustable rate mortgages are poised to reset in October, and the interest rate cut could ease the pain some ARM holders will feel. But keep in mind, ARMs differ in rate adjustments based on the indices or Treasury note they are tied to. A borrower with an ARM tied to the Treasury averages will benefit from the lowered rates. However, if your ARM is tied to the London Interbank Offered Rate (Libor) the Fed rate cut won’t necessarily translate into relief.
3. Home mortgage rates could potentially drop
This one’s a little more tenuous, because interest rates for mortgages are typically tied to the yield on 10-year Treasurys, not the federal funds rate. But Treasurys tend to follow the same direction as the federal funds rate, so a drop in the interest rates offered on mortgages may be in the works. On the other hand, if inflation rears its ugly head, rates may see an increase.
4. Auto Loans could get cheaper
Car shoppers will be happy to hear that some auto loans may be impacted by the drop in the federal funds rate. If you’re shopping for a new or used car, it’s a good idea to compare financing options from different sources. New loans taken out via banks and credit unions will probably see the biggest impact as a result of the rate cut.
5. Variable credit card debt will get cheaper
About 85% of all credit cards carry variable rates and these rates are usually tied to the prime rate. Therefore the interest rate cut should trickle down to some credit card debt holders, as long as the card’s current rate exceeds the minimum rate limit established by the card issuer (typically 14-15 percent).
6. Savers will earn less interest
When interest rates fall, there is a downside -- for the savers among us. Banks may pay lower interest rates on savings accounts, certificates of deposit, and money-market accounts.
7. Stock portfolios and 401(k)s will look a little healthier, at least for now
Stocks sometimes soar on news of an impending Fed rate cut, which Wall Street took as a sign that the Federal Reserve is prepared to act decisively to head off trouble in the economy. At least in the short term, this may give a boost to stock portfolios and stock-heavy 401(k)s.
Nobody can say exactly how the Fed rate cut will influence other interest rates. These are only assumptions based on conventional economic wisdom and the behavior of financial markets in the past. The best way to know what is happening to interest rates is to follow market trends yourself, and call or visit LendingTree to find out if you can benefit from the rate cut.