Best financial moves to make

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Now that the Federal Reserve Board has held short-term rates steady, ending a year of rate-cutting, what are the smart moves to make?

It depends. Here’s a look at what current rates are in a variety of consumer banking products, how rate changes affect them and the best moves to make.

Fixed-rate mortgages: Rates have been volatile for the past month, rocketing up one week, swooping down the next. When the national index of 30-year mortgage rates plunged to 6.85 percent on Jan. 16, that probably marked mortgage rates’ low point for a while.

Long-term mortgage rates do not follow changes in the federal funds rate. Instead, they move roughly with long-term bond yields. The bond yields, in turn, respond to broad economic factors, such as inflation and unemployment rates.

Bond traders are ready to pounce on any definitive signs of economic recovery. So far they have seen only mixed signals, and that explains the recent rate volatility. When they see positive signs, such as increased factory production and a subsiding in the unemployment rate, long-term rates will begin to rise. Federal budget deficits are expected to contribute to a rise in bond yields and long-term interest rates.

Best move now: Any time you can get a 30-year loan for 7 percent or less, you should consider locking in. Anything less than 7.25 percent is good by recent historical standards. So watch the roller coaster, and lock in on the dips.

That means time is running short for people who want to buy or refinance at today’s historically low rates.

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 mortgage search engine to locate the best deal.

The 30-year fixed-rate mortgage averaged 6.97 percent on Jan. 23 in the national weekly survey. The 15-year fixed-rate mortgage averaged 6.43 percent.

Adjustable-rate mortgages: ARM rates started responding to the Fed’s aggressive rate cuts last year. That’s because they tend to follow changes in short-term rates, such as the yields on short-term Treasury bills and notes, which track the federal funds rate closely. ARM rates should stay low for at least the next couple of months, but eventually the Fed will raise short-term rates and ARMs will follow. When the Fed will raise rates is anyone’s guess. It might be in late 2002 or even 2003.

Best move now: Someone who plans to live in a house for only a couple of years might want to consider a short-term ARM now that rates on such loans have fallen. The same holds true for someone who needs a little extra help getting into a home. But fixed rates are low by historical standards. Borrowers with a longer-term horizon should probably lock in a low rate for 30 years rather than get an ARM with a rate that can head in only one direction — up.

One-year ARMs averaged 5.5 percent on Jan. 23 in the national weekly survey. Search for the best ARM rates in your area.

Home equity loans: Home equity loan rates tend to follow the prime rate, though rates on longer-term loans (those with terms of 10 years or 15 years, for instance) behave more like long-term, fixed-rate mortgage rates.

Best move now: Through 2001, we advised borrowers to hold off taking out home equity loans on the expectation the Fed would keep cutting rates. The rationale was simple: When the Fed is cutting rates, equity loan borrowers can get lower rates by waiting until the end of the rate-cutting cycle.

That end is at hand, which makes the next few weeks an ideal time to lock in a low equity loan rate.

Equity loan rates averaged 8.28 percent on Jan. 23. Use Bankrate’s home equity loan search engine to find the best rates in your area.

Home equity lines of credit: Most equity lines of credit feature variable rates and payments tied to the prime rate, which declines whenever the Fed cuts rates. Because the Fed didn’t cut the overnight rate on Wednesday, don’t count on the prime rate going any lower.

Best move now: Home equity lines of credit tend to have lower rates than home equity loans, but because the rates adjust with the prime rate, they’re at or near their lowest point.

At the same time, the prime rate could stay low for a longer-than-expected period. The last severe rate-cutting cycle took the federal funds rate to 3 percent in September 1992. Because the economy took a long time to rebound, the Fed didn’t start hiking the funds rate again until February 1994. If the same scenario plays out this time around, customers who get lines of credit won’t see their rates increase for a long time.

Equity line of credit rates averaged 5.28 percent on Jan. 23. Search for the best HELOC rate in your area.

CDs, savings accounts, money market funds: Interest rates on long-term certificates of deposit are stagnating after a brief rebound from their long slide.

Best move now: Shop carefully before you buy. Check for the best CD rates across the country, then look for the best money-market fund rates. Be sure to check Internet banks — they offer some of the highest rates around.

Short-term rates will continue to drop, while long-term (one-year or longer) rates will resume their slow rise when there are steadier signs of economic recovery. Even so, it’s not time to lock in long-term rates. It will take them a while to get off the floor, so you might consider staying with short-term CDs or a money market fund while the long-term rates build. The rates aren’t great, but you’re not locked in, either.

One-year CD yields averaged 2.12 percent on Jan. 16, while money market account yields averaged 1.13 percent. Search for CD rates or money market rates in your area.

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 most variable-rate cards are re-priced each quarter, card customers have already enjoyed the benefits of the 11 rate cuts in 2001.

However, with all the rate cuts in 2001, many card customers have hit the “floors” — the minimum annual percentage rates allowed in their cardholder agreements. The interest rates on their cards won’t drop any lower. Of the variable cards surveys, 26 percent have floors, and 19 percent have reached the floor. Be sure to check your cardholder agreement to see if your card has a floor, and whether you’ve hit it.

Best move now: Consider transferring a balance to a lower-rate credit card. Because we probably have seen the end of the Fed cuts, there’s a good chance that variable-rate card in your wallet isn’t going to drop much lower. If you can find a better rate on another card — take it. The average rate on a standard variable-rate card was 13.36 percent on Jan. 23; the average rate on a standard fixed-rate card was 14.04 percent. Compare credit cards using Bankrate’s credit card search engine.

Car loans: research shows that interest rates on new-car loans tend to shift in lock step with the prime rate.

Not all car loans are tied to the prime rate, however. To keep their car-making machinery humming, automakers sometimes instruct their captive lenders — such as Ford Motor Credit and General Motors Acceptance Corp. — to make rock-bottom financing deals. They’d rather lose money on the loans than suffer the losses associated with shutting down auto plants.

Best move now: If you’re arranging financing for a new car, don’t ignore dealer financing. Auto manufacturers rolled out the deals in an attempt to bolster auto sales, and some have lingered into 2002.

If you have an outstanding car loan, 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 8.42 percent on Jan. 23, while rates on 36-month used-car loans averaged 9.39 percent. Search for car loans in your area. staff writers Laura Bruce and Lucy Lazarony contributed to this report.

— Updated: Dec. 20, 2002