Most Americans know the Federal Reserve Board has slashed interest rates dramatically this year. Unfortunately, many don’t know what to do about it.

To help solve that problem, we’ve outlined the financial steps people can take to capitalize on the 2 percentage points’ worth of rate cuts the Fed has implemented this year. 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: Rates on fixed-rate mortgages move in anticipation of Fed moves, rather than waiting for the actual moves to happen. They follow changes 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 one-half of a percentage point, or 50 basis point, rate cut on April 18 probably won’t translate into a similar decline in mortgage rates.

In fact, it may even lead to higher fixed mortgage rates. Recently, the economy has shown signs of bottoming. The additional economic stimulus this surprise cut will provide could firm up that bottom and lead to better economic performance later this year. As a result, fixed-rate mortgages may very well rise!

Best move now: Strongly consider locking in a low-rate mortgage. We’re at a crossroads and if the economy responds to this surprise cut, the long-term trend for mortgage rates may very well be higher.

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 7.15 percent on April 11.

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 a 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 — at least for now — long-term borrowers should forget ’em!

Fixed-rate loans are still cheap enough 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.

One-year ARMs averaged 6.36 percent on April 11.
Click here to search for the best ARM rates in your area.

Home equity loans: Home equity loan 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: For months, we’ve advised borrowers to wait to take out a home equity loan 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. Now, that end may be in sight.

There isn’t a huge amount of urgency to act now, so don’t be pressured into a loan you can’t afford. The prime rate isn’t going to rise anytime soon. But it may not fall much further, if at all, either. So there’s not as much incentive to wait to borrow as there was earlier in 2001.

Equity loan rates averaged 9.26 percent on April 11. Use Bankrate’s
equity loan search engine to find the best rates in your area.

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 because just about all equity lines of credit feature variable payments and rates. But that’s only if the Fed keeps cutting interest rates.

Best move now: We’ve been advising borrowers to go with home equity lines of credit rather than home equity loans the past few months. But it might be time to reconsider that strategy. The Fed might not have to cut rates any more and that means it makes sense to lock in a low fixed-rate equity loan. After all, if you get a variable-rate line of credit when rates are at or near a nadir, your risk of higher rates and payments in the future rises substantially.

Equity line of credit rates averaged 8.1 percent on April 11.
Click here to search for the best home equity line of credit.

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. The latest cut means more good news for credit card customers.

Because many variable rate cards are re-priced each quarter, many card customers are just beginning to enjoy lower rates stemming from the three interest-rate cuts in the first quarter of 2001. Some variable cards are re-priced monthly. These customers will see their rates drop 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. The average rate on a standard variable-rate card was 17 percent on April 4, while the average rate on a standard fixed-rate card was 15.5 percent. Compare credit cards using Bankrate’s
credit card search engine.

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 April 18 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 9.16 percent on April 11, while rates on three-year used car loans averaged 10.21 percent.
Search here for car loans in your area.

CDs, savings accounts, money market funds: Look out below! Wednesday’s 50 basis point cut in overnight interest rates will trickle down to CD interest rates.

Best move now: CDs have been on a downhill slide for the better part of this year. This aggressive action by the Fed definitely means rates will continue to drop. The national average yield on a one-year CD is about 4.15 percent. It may be worthwhile to lock in that rate. The average on a two-year CD is 4.31 percent. Buying one of those is a dicier proposition. Rates could head up by the end of this year and you don’t want to be stuck with a low, long-term interest rate. You can compare rates using Bankrate’s
CD search engine.

— Posted: April 19, 2001