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Best moves to make
now that the Fed cut rates
By Michael D. Larson, Lucy Lazarony and
Laura A. Bruce • Bankrate.com
Most
Americans know the Federal Reserve Board is cutting interest rates.
Unfortunately, many don't know what to do about it.
To help solve that problem, we've outlined
some financial steps people can take to capitalize on this month's
cut and those expected in the months ahead. People who plan to take
out home equity lines of credit, auto loans, mortgages or other
loans anytime soon should pay attention. 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.
All of the tips and figures below come from
Bankrate.com's staff of financial experts and database of consumer
interest rates.
Fixed-rate mortgages:
We've said it many times before, but it bears repeating:
Rates on fixed-rate mortgages move in anticipation
of Fed rate cuts, rather than waiting for the actual cuts to happen.
They follow movements in bond market yields
(which move up and down daily based on what various indicators and
reports say about the state of the economy), not changes in the
fed funds rate. So, the 50 basis point cut on March 20 won't translate
into a similar decline in mortgage rates.
Consider that the lowest 30-year rates of 2001
were seen at the very beginning of the year -- before the Fed really
started cutting the rates it controls directly! That was in response
to some negative economic reports and falling stock prices. After
policy makers cut their rates in January, mortgage rates actually
crept higher on guarded optimism those cuts would reinvigorate the
economy.
That hasn't happened, so experts are once again
predicting future Fed cuts, and mortgage rates have revisited their
January lows. But for 30-year rates to head significantly lower
(read: hit 6.5 percent, on average) than they are now, government
and private-sector studies are going to have to show that the economy
is getting even worse than it is already.
Best move now:
Strongly consider locking in a low-rate
mortgage. We're at a crossroads -- rates could
go lower if the stock market keeps crumbling and the economy tanks,
but they've fallen so much already that the old maxim "a bird
in the hand is worth two in the bush" applies.
The Fed's post-meeting statement suggested that policymakers will
cut rates as much as necessary to keep the economy from tanking,
too. That means long-term rates may never see the bad economic news
they need to in order to fall further.
This advice is especially important to certain
borrowers, such as those who could lose their jobs given the economy's
state. They won't qualify for mortgages if they get laid off, so
refinancing now as a precautionary step against leaner times later
might make sense. The Fed may save the day eventually, but for now,
the job market looks a little weak.
Here's another bit of 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. Thirty-year
rates averaged 7.02 percent on March 14 -- the date of the last
Bankrate.com weekly benchmark survey.
Adjustable-rate mortgages:
ARM rates have started responding to the Fed's aggressive
rate cuts and are becoming more attractive. The recent trend follows
a long period during which ARMs offered negligible rate and payment
advantages over fixed-rate mortgages. Rates on short-term ARMs should
continue declining as long as the Fed remains in rate-cutting mode,
then stabilize at relatively low levels until the economy heats
up again.
Best move now:
Lenders have started pricing ARMs attractively enough that they
make sense for certain customers. Someone
who plans to live in a house for only a couple of years, for example,
might want to consider a short-term ARM. But long-term borrowers
should forget 'em!
Fixed-rate loans are so cheap right now that
it makes sense to lock in a low rate for 30 years rather than get
an ARM with a rate that has a good chance of rising from current
levels. At 7.02 percent on March 14, 30-year fixed rates were much
lower than both the 10-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, most people with variable-rate credit cards will see their
interest rates decrease very quickly by the same amount the Fed
decreased rates.
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 the Fed's latest rate cut. Some variable credit card
accounts are re-priced shortly after the Fed changes rates. Other
accounts are re-priced quarterly so you may have to wait a while
to enjoy those lower interest rates. The average rate on a standard
variable-rate card was 17.29 percent on March 14, while the average
rate on a standard fixed-rate card was 15.4 percent.
Car loans: Bankrate.com
research shows that interest rates on new-car loans tend to shift
in lock step with the prime rate. Because the prime rate will drop
in the wake of the March 20 cut, rates on auto loans from financial
institutions will follow suit in the near future.
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 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 auto sales. If you
have a loan for a new car, you may want to consider refinancing.
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 48-month new-car loans averaged 9.3 percent on March 14
while rates on three-year used car loans averaged 10.35 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:
Try holding off on borrowing for as long
as possible. Rates on home equity loans should fall steadily over
the next couple of months as the market reacts to the Fed's 2001
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
that might still be coming. Equity loan rates averaged 9.49 percent
on March 14.
Home equity lines of credit:
Both new and existing line of credit customers will pay significantly
less to borrow now that the Fed has cut rates so much since the
start of the year. They may save even more in the months ahead.
That's 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 even more if the Fed
cuts rates again this spring. The average rate on a line of credit
was 8.48 percent on March 14.
CDs, savings accounts,
money market funds: Interest rates on certificates of deposit
have been falling fairly steadily since the beginning of the year.
Considering the course we're on, there's no reason to think the
scenario will change any time soon.
Best move now: CDs
are at least a point lower than they were just a couple months ago.
Nevertheless, locking in a guaranteed return may be a lot more appealing
than taking a gamble on the stock market. If
economic indicators continue to point toward a mild recovery in
the second half of the year, you may want to pop for some short-term
CDs so you can be ready to buy when rates increase. The average
yield on a one-year CD was 4.47 percent on March 14.
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