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The best moves to make now that the
Fed cut rates
By • Bankrate.com
So
now that the Federal Reserve Board has started cutting rates, what
can consumers do about it?
They can map out strategies
that minimize their overall borrowing costs and maximize their savings
returns.
Any time the Fed shifts
its interest rate policy, Americans need to evaluate their financial
situations and see if changes need to be made. That's especially
true in this case, since the Fed cut rates by a larger-than-usual
one-half of a percentage point, or 50 basis points.
Here are some common
financial products and strategies that apply, given the current
interest rate outlook.
Fixed-rate mortgages:
If you've been shopping for a loan lately, you know mortgage lenders
anticipate Fed interest rate cuts well before those cuts actually
occur. Thirty-year rates fell below 8 percent in August and have
continued to decline. As of early January, they're down to near
7 percent.
Best move now: Mortgage
rates will probably keep falling as long as it appears the Fed will
keep having to cut the rates it controls directly to prevent the
economy from tanking. On the other hand, rates could stabilize if
economic data released over the next several weeks shows that the
economic slowdown isn't as severe as people think and only minor
Fed stitching is required, rather than radical rate surgery.
Either way, rates almost certainly won't rise.
Both current homeowners who are planning to refinance and home buyers
shopping for property right now should figure out if they qualify
for a mortgage. But they should refrain from locking in a rate for
as long as possible in order to take advantage of any further rate
declines. Thirty-year fixed rates averaged 7.2 percent on Dec. 27.
Adjustable-rate mortgages:
In the current rate environment, taking out an ARM makes little
sense. While rates on long-term fixed-rate mortgages start dropping
well in advance of Fed rate cuts, rates on short-term ARMs don't
decline until cuts appear imminent or actually take place. Now that
that's happened, ARM rates will start falling. But they still don't
offer enough of a rate or payment advantage to compensate for the
risk of future rate increases that ARM customers assume, but fixed-rate
customers don't. One-year ARM rates averaged 7.02 percent on Dec.
27.
Best move now: Forget
'em! Go with a long-term, fixed-rate loan. Enough said.
Credit cards: Experts
say about 70 percent of all credit cards are variable-rate cards
and most of those are linked to The Wall Street Journal prime rate,
which usually falls the day after the Fed cuts rates. Because of
this, people with variable-rate credit cards will see their interest
rates decrease very quickly by 50 basis points.
Best move now: Consider
transferring a balance to a low, variable-rate credit card. A variable-rate
card that beats the rates on any other card in your wallet probably
will be an even better deal following rate cuts by the Fed. Some
variable credit card accounts are repriced shortly after the Fed
changes rates. Other accounts are repriced quarterly so you may
have to wait awhile to enjoy those lower interest rates. The average
variable-rate standard card had a rate of 17.09 percent on Dec.
27.
Auto loans: Bankrate.com
research shows that interest rates on new-car loans tend to shift
in lock step with the prime rate. With the prime rate poised to fall
by 50 basis points, rates on auto loans from financial institutions
should follow suit almost immediately.
Not all car loans are tied to the prime rate,
however. And even with a drop in interest rates, few banks and finance
companies will be able to match the super-low financing deals available
from captive finance companies of auto manufacturers, such as Ford
Motor Credit and General Motors Acceptance Corp.
Best move now: If
you're arranging financing for a new car, check out the new lower
rates, but don't ignore dealer financing. Auto manufacturers are
rolling out the deals in an attempt to bolster slowing auto sales.
Keep in mind that used-car loans are slower to follow the prime
rate's moves, and may not change for a month or two. Even when a
shift in rates occurs, it may be less than the prime rate swing.
Used-car loan rates averaged 10.71 percent on Dec. 27, while rates
on 48-month new car loans averaged 9.64 percent.
Home equity loans:
Home equity rates tend to follow the prime rate. Because it changes
within a day or two of a Fed cut, new home equity loan customers
will start seeing lower rates very soon. Existing borrowers, however,
won't see an impact at all because equity loans have fixed payments
and rates.
Best move now: Try
holding off on borrowing for as long as possible. Rates on home
equity loans should fall as lenders react to the Fed rate cut. Because
more Fed cuts are likely coming, equity loan rates should drop even
further in the months ahead. They averaged 10.1 percent on Dec.
27.
Home equity lines of credit:
Both new and existing line of credit customers will pay less now
that the Fed has started cutting rates because almost all home equity
lines of credit feature variable payments and rates like credit
cards. The average rate on a line of credit was 9.33 percent on
Dec. 27.
Best move now: If
it's variable, it's headed down. If the borrowing choice comes down
to "home equity loan vs. home equity line of credit,"
go with the line of credit. That way, your payments and rate will
drop as the anticipated future Fed rate cuts materialize.
CDs, savings accounts, money
market funds: Interest rates on certificates of deposit aren't
nearly as sensitive to anticipation of Fed rate juggling as mortgage
rates are. But they eventually do follow the trend. Now that the
Fed is actually cutting rates, the downward trend that started to
emerge recently will accelerate.
Best move now: Lock
in for as long as possible as early as possible. There's virtually
no reason for CD rates to rise in the near future and plenty of
reason for them to fall now that the Fed has started cutting rates.
The average rate on a one-year CD was 5.37 percent on Dec. 27.
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