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The best moves to make now that the
Fed is cutting rates
By Michael D. Larson, Lucy Lazarony and Laura A.
Bruce • Bankrate.com
Most
consumers know rates are heading in the right direction. Now, they
need to know what to do about it.
Here are several financial steps people can take
to capitalize on this month's Federal Reserve Board rate cuts and
those expected in the months ahead. They apply to people who want
to take out home equity lines of credit, auto loans, mortgages or
other debt.
We've also included advice for consumers holding
credit cards and savers looking to maximize their return on certificates
of deposit and money market accounts. The tips and figures come
from Bankrate.com's staff of financial experts and database of consumer
interest rates.
"As rates drop, consumers always find it
advantageous to do what they want to do -- to go out and buy that
car, to get that house or to refinance their current house,"
says Scott Reed, chief financial officer at Winston-Salem, N.C.-based
BB&T Corp. "As rates drop and get more attractive, they'll
tend to get on board."
Fixed-rate mortgages:
This is the trickiest part of the consumer finance world for consumers
to navigate right now. Mortgage rates tanked in late 2000 as the
economy sharply decelerated. That's because mortgage rates don't
wait for actual Fed rate cuts to change. They rise and fall with
economic news releases, stock price movements, corporate announcements
and other things the same way bond yields do.
It doesn't matter that the Fed almost certainly
will cut rates at the end of January. What matters is whether they'll
have to do so again and again over the course of 2001 because the
economy is continuing to weaken. Unfortunately, no one seems to
know right now whether the slowdown was a temporary blip that's
already a part of history or whether it's going to get worse.
Best move now: Keep
floating that interest rate. Rates should continue to decline because
economic data coming out over the next several weeks will probably
be pretty negative. But, if you have to refinance to escape a crushing
debt load or want to do so to lower your monthly payments because
you think you might get laid off in a couple of months, by all means,
don't hesitate to do so. And remember, the outlook is very murky
right now!
Here's some other advice: Know what you can afford
in a home and a loan, and don't take a deal that won't work for
your budget. When you're ready to buy, try the Bankrate.com mortgage
search engine to locate the best deal.
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.
ARM rates have started to come down, but customers still aren't
getting enough of a rate or payment advantage to take on the risk
of future rate increases.
Best move now: Forget
'em! Go with a long-term fixed-rate loan. At 7.16 percent on Jan.
24, 30-year fixed rates were much lower than both the ten-year average
of 7.85 percent and five-year average of 7.56 percent computed from
Bankrate.com's historical database.
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, many people with variable-rate credit cards will see their
interest rates decrease very quickly by the same amount as any Fed
decrease.
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 will
be an even better deal following any 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 17.4 percent on Jan. 24.
Car loans: Bankrate.com
research shows that interest rates on new car loans tend to shift
in lock step with the prime rate. If the prime rate drops by 25 basis
points, expect rates on auto loans from financial institutions to
follow suit almost immediately.
Not all car loans are tied to the prime rate,
however. Even with a drop in interest rates, few banks and finance
companies will be able to match the super-low financing deals available
from the 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, 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. Rates on 36-month used car loans averaged 10.59
percent on Jan. 24, while rates on 48-month new car loans averaged
9.51 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 shortly thereafter. Existing borrowers,
however, won't see an impact at all because equity loans have fixed
payments and rates.
Best move now: Hold
off on borrowing for as long as possible. Rates on home equity loans
should fall steadily over the next several months as the market
reacts to Fed rate cuts. If you can't wait to borrow, consider going
with a variable-rate home equity line of credit instead of a fixed-rate
loan. That way, you'll be able to benefit from any Fed rate cuts.
Equity loan rates averaged 9.88 percent on Jan. 24.
Home equity lines of credit:
Both new and existing line of credit customers will pay less if
the Fed starts cutting rates because almost all home equity lines
of credit feature variable payments and rates like credit cards.
Best move now: If
it's variable, it's probably 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 Fed cuts rates. The average rate on a line of credit
was 9.03 percent on Jan. 24.
CDs, savings accounts, money
market funds: Interest rates on certificates of deposit have
been falling fairly steadily in recent weeks, much of it in anticipation
of Fed rate cuts. With a 25 basis point cut expected next week and
another possible in March, there's little reason to think interest
rates on CDs will rise any time soon.
Best move now: CD
rates have come down about a half-point in recent weeks, but that
doesn't mean it's too late to add CDs to your portfolio. Some decent
rates are still being offered -- especially for the shorter term.
If you have any thought of buying CDs, now's the time. The average
yield on a one-year CD was 4.84 percent on Jan. 24.
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