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 two-and-a-half 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, which is one of only two rates the Fed controls directly. As a result, the one-half of a percentage point, or 50 basis point, rate cut on May 15 won’t translate into a similar decline in mortgage rates.

Truth be told, fixed mortgage rates will likely rise in its wake. The Fed’s cuts in 2001 have been so aggressive that many market watchers think the economy will rebound later this year. Since mortgage rates anticipate changes in the economy, they will probably climb long before the economy picks up — just as they fell last fall before the Fed started cutting rates.

Best move now: Strongly consider locking in a low-rate mortgage. Rates have virtually no chance of falling significantly and a fair chance of rising as 2001 progresses. Mortgage rates are still below their historic averages too. Good deals can be found, even if rates are a little higher than they were in March.

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 7.08 percent on May 9.

Adjustable-rate mortgages: ARM rates started responding to the Fed’s aggressive rate cuts earlier this 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). With the Fed unlikely to raise rates anytime soon, ARM rates should stay low or even go lower over the next couple of months.

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 them have fallen. The same holds true for someone who needs a little extra help getting into a home. But fixed-rates remain low by historical standards, even after recent increases. Those with a longer-term horizon should probably 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 6.29 percent on May 9.
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 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.

Now, that end may either be here already or just around the corner. That makes the next couple of months a great time to lock in a low equity loan rate. If you can afford to make the payments on a loan, wait a couple of weeks for banks to adjust their rates to reflect the latest Fed cut, then pounce!

Equity loan rates averaged 9.07 percent on May 9. 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 are paying significantly less to borrow today than they were in 2000. That’s because most equity lines of credit feature variable rates and payments tied to the prime rate, which declines whenever the Fed cuts rates. The prime rate is probably close to bottoming out, though, after falling 250 basis points this year. So don’t expect your HELOC rate to hit 3 percent.

Best move now: While home equity lines of credit, rather than loans, were the better option for borrowers earlier this year, that isn’t the case any more. With the Fed about done cutting rates (or maybe done already), borrowers should give banks a couple of weeks to adjust their rates to reflect the Fed’s latest cut, then lock in low fixed-rate equity loans. 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 7.63 percent on May 9.
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 had to wait until April to enjoy lower rates stemming from the three interest-rate cuts in the first quarter of 2001. The most recent cuts will probably show up on July card bills. But some variable cards are re-priced monthly. These customers will see their rates drop very quickly by the same amount the Fed decreased rates.

Still, with all the rate cuts this year, some card customers have hit the minimum annual percentage rates allowed in their cardholder agreements. The interest rates on their cards won’t drop any lower. Some variable rate cards come with minimum APRs or floors and some do not. Be sure to check your cardholder agreement.

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 16.19 percent on May 9, while the average rate on a standard fixed-rate card was 15.74 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 fall when the prime rate does. But it can take time for prime-rate declines caused by the Fed to work their way through to the rates banks charge consumers.

Not all car loans are tied to the prime rate either. 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 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 9.04 percent on May 9, while rates on three-year used car loans averaged 10.13 percent.
Search here for car loans in your area.

CDs, savings accounts, money market funds: Watch out for falling interest rates!

Best move now: This is the time to do a lot of shopping before buying. Check Bankrate.com for the best CD rates across the country, then look for the best money market rates. Be sure to check Internet banks — they offer some of the highest rates around.

If you think rates will continue to drop, go with a CD. Lock in the best rate you can get, but you might want to opt for a shorter maturity. If the economy turns around, rates will head back up and you don’t want to be stuck with a low-rate CD. If you think rates are about to start rising, go with a money market account — you’ll reap the benefit of the rising interest rate and won’t be locked in at a lower rate.

One-year CD yields averaged 3.9 percent on May 9, while money market account yields averaged 1.9 percent.

— Posted: May 15, 2001