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 drastic 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 cut rates significantly during 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 50 basis points.

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 cuts. 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 50 basis points, expect rates on auto loans from financial institutions to follow suit soon after.

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 the Fed’s 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 when the Fed cuts 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 today’s 50 basis point cut and another cut 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.

— Posted: Jan. 31, 2001