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Information on mortgages, home equity loans, and consumer credit to help you use the power of financing to your advantage.
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Mortgages > Refinance
When interest rates fall, no one wants to miss the boat
CALVIN WOODWARD, Associated Press Writer. Associated Press.
Copyright Associated Press
WASHINGTON (AP) _ The Federal Reserve's decision to cut interest rates is a call to action for everyone interested in cheaper credit.
It's a time to read the fine print on credit card agreements to see if lower rates will ever trickle down to you. A time to explore the value of a home equity loan that could slash the interest on your debts. A time to figure out when to borrow and when to sit tight.
A Fed decision on interest rates is like a rock dropped in a pond. It causes ripples that bob many boats, some close by, others in the distance. It can take six months or a year for the big splash to play out.
A look at the ripple effect:
Mortgage Rates: Long-term fixed mortgage rates are often adjusted in anticipation of what the Fed will do. By the time the Fed acts, the effects may have already been absorbed.
"It's as if the pond was looking up and saw the rock coming," said Michael Larson, an analyst at Bankrate.com in North Palm Beach, Fla., a consumer finance Web site.
In December, the month before the Fed began its latest round of interest-rate cuts, average 30-year mortgages dropped almost a full percentage point. They have crept up a bit in the last few months.
The Fed most directly affects short-term interest rates such as adjustable one-year mortgages; its impact on 30-year mortgages is limited.
Indeed, if bond traders believe the economy will pick up because of the Fed's actions, fixed mortgage rates could go up instead of down. "It's really more of a Wall Street game, what you're charged on a mortgage," Larson said.
Car Loans: Jack Murphree, 30, went looking for a new Subaru in Chattanooga, Tenn., on Wednesday, motivated in part by the Fed's cut of a quarter-point. For the best loan bargain, however, he might be better off waiting.
"It takes a little while for it to trickle down at the retail level _ a couple weeks," said Jeff Henry, financial services manager at Kelly Cars, where Murphree was shopping.
The success of the Fed's cuts in pumping the economy will depend on whether people like Murphree, an accountant at a manufacturing company who is married with no children, take advantage of cheaper credit to increase their spending.
For him, there are many more ripples in the pond than the ones coming from Washington.
"I think it helps, but I think that there is a lot of fear," he said. "I know of several people who have lost their jobs in the last six months who are well educated.
"It makes me very hesitant to make large purchases. When you know people it happens to, it kind of brings it home."
In Fargo, N.D., Chad Christianson, finance and insurance manager at Lunde car company, said sales have declined despite lower auto- loan rates from cuts by the Fed earlier this year.
"These people are not making any money on investments so they are not spending it," he said. "In my little building, the lower the interest rate goes, the more it hurts us."
Larson analyzed the time it took for previous rounds of rate cuts from Washington to reach consumers in the marketplace. He found rates for four-year loans for new cars bottomed out seven months after the last round, in the autumn of 1998.
Home equity: These loans or lines of credit, which many people use for home improvement or to consolidate debt at a lower cost, are sensitive to actions by the Fed.
"The one area where many consumers do benefit is in home equity loans," said George J. Fantini Jr., a mortgage banker who is chairman of Fantini & Gorga in Boston.
"These rates should continue to come down," Larson said.
Home equity lines of credit _ a cross between traditional loans and credit cards _ became the cheapest four months after the 1998 cycle of Fed cuts.
But while rates for new borrowing should come down quickly, rates for outstanding loans or credit are often adjusted only periodically _ once a year, in some cases.
Certificates of Deposit: When rates charged to consumers come down, so do rates paid to them in traditional savings and investments. Safe but low-yielding CDs, for example, will become less attractive for all but the most risk-averse saver, experts say.
Credit cards: Roughly 70 percent of credit cards have variable interest rates, which should theoretically come down.
The ripple effect from Wednesday's action will reach many of those cardholders whenever the card issuer revises rates _ for some, four times a year, or perhaps monthly.
Such consumers should have already seen their rates come down from earlier Fed cuts this year.
But there's a hitch. Up to one-third of credit cards with variable interest have a floor on rates, Larson said. So only a portion of declining interest rates in the marketplace, or none of them, may be passed on.
People stuck in that boat, however, can ask the issuer to change the conditions or find a card offering a better deal. That way, they can still catch the ripple.
• Apply now for a home loan!
On the Net: http://www.bankrate.com Federal Reserve: http://www.federalreserve.gov
Associated Press Writer Ananda Shorey contributed to this report.
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Companies: Federal Reserve Board (NAICS: 921130, Sic:9300 )
Dateline: WASHINGTON
Text Word Count 880
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• Mortgages > Refinance Articles Archive.
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