In an effort to help alleviate some of the negative effects of the problems in today’s housing and mortgage markets, the Federal Reserve recently cut interest rates a quarter of a percentage point off the federal funds rate, a key short-term interest rate.
But what impact is this going to have on borrowers? If you have an adjustable rate mortgage is the rate going to drop? If you’re looking to buy a home, will you now qualify for a larger loan? And what about credit card rates and other loans?
For some, the Fed rate cut should provide a measure of immediate relief. Others, however, are likely to experience less of an impact. Here’s a brief overview of how it’s likely to affect consumers:
HomeownersBecause most banks have followed the Fed’s lead and cut their prime lending rates, those with adjustable rate mortgages (ARMs) tied to prime should benefit from a reduced rate hike at reset time. However, not all ARMs are linked to the prime lending rate. Those with ARMs based on other indices, such as Libor (the London interbank offered rate), aren’t likely to get the same break. Or, it may take longer for the effect of the rate cut to filter down and impact their particular index.
If you have an ARM, you can check your loan documents to determine which index it’s linked to. You may also want to check the costs involved in refinancing. As thirty-year, fixed mortgage rates dropped in anticipation of the Fed rate cut, it may be a good time to consider converting from an ARM to the security of a fixed-rate loan.
Since home equity lines of credit (HELOCs) are usually linked to the prime rate, rates on these are expected to fall. However, it may take a couple of months before the impact appears on your credit statement. If you have a fixed-rate home equity loan, you might be able to get a better rate by refinancing to a variable-rate HELOC.
HomebuyersThe rate cut is potentially good news for homebuyers as it could stimulate more bank-to-bank lending and increase the amount of available credit on the market. In turn this could make it possible for more people to get loans -- particularly among those applying for the recently harder-to-find jumbo mortgages (those that exceed the conforming limit that is currently set. However, long-term fixed mortgage rates tend to track the yield on 10-year Treasury bills rather than the federal funds rate and so they aren’t expected to be directly affected by the Fed rate cut. However, mortgage rates are already historically low and expected to remain fairly stable in the months ahead. This, combined with the recent drop in housing prices in many parts of the country, makes now a good time to be shopping for a home.
SaversRates on most savings accounts, money-market accounts and certificates of deposit (CDs) typically track the prime rate and have already started to fall. In the case of some CDs, where the advertised rates have remained constant, the maturity dates have been shortened so their locked-in rates are available for fewer months.
If you were fortunate enough to have purchased a CD prior to the rate cut, try to hang onto it as long as possible as you’re unlikely to be able to quickly replace it with another one at the same rate. Or if you have some money you’re looking to invest, you may want to lock it away in a CD as soon as possible since some economists are predicting a possible additional quarter-point rate cut in the months ahead. Shop around and compare rates to be sure you’re getting the best available deal.
Credit card customersOverall, variable credit card rates are expected to fall. However, individual rates depend to a great extent on your own credit history so you may not see a drop in your own rates until you demonstrate a consistent track record of reliable payments. Lower bank rates, however, mean now is a great time to shop around for a less expensive credit alternative. You may be able to save a considerable amount in interest charges by paying off your credit cards and combining your payments with a low-interest debt consolidation loan.
Student loans/auto loansThose with variable rate student loans tied to the prime rate should benefit from the rate cut. However, as with ARMs, those with non-prime-based student loans may not see their loan rates decline. New car loans based on manufacturers incentives are not expected to drop since those rates are already artificially low. However, rates should drop on both new and used car loans available through banks and credit unions.