What to expect from Fed's rate cut

December 16, 2007|By Carolyn Bigda | Carolyn Bigda,TRIBUNE MEDIA SERVICES

Holiday bills have you worried? Bracing for your mortgage payment to reset higher? Have a certificate of deposit coming due?

In all three situations, the Federal Reserve plays an underlying role. And since September, that role has been to help push the interest rates on your credit card, mortgage and savings accounts lower.

On Tuesday, the Fed lowered its benchmark rate to 4.25 percent from 4.5 percent, its third cut this year.

In a falling-rate environment, here is what to expect, and what you may want to do to make the best of it:

Monitor mortgage rates. If you have an adjustable-rate mortgage (ARM) that is about to reset, you could just get a break.

Following Fed movements, the one-year Treasury index, a popular benchmark for adjustable-rate mortgages, has dropped to 3.2 percent from 5 percent this summer.

The difference translates into huge savings for ARM borrowers, said Greg McBride, senior financial analyst for Bankrate.com.

Let's say you have a $200,000 mortgage balance, and your interest rate is the index, plus 2.5 percentage points. Assuming you have 27 years remaining on the loan, your monthly payment would go up $140 if your loan adjusted now. Last summer, the payment would have risen $370 - a difference of $2,760 over the course of a year.

"Someone is going to be able to make that payment, stay on time and keep their home," McBride said.

If your rate has reset, you may want to consider swapping your ARM for a fixed-rate, 30-year mortgage. Although the Fed has little influence over long-term rates, concern about the housing market and its impact on the economy have lowered fixed mortgage rates.

If you don't qualify to refinance because of poor credit, then you may be able to temporarily freeze your current rate. President Bush this month announced plans to allow some subprime borrowers to lock in their existing mortgage rates for five years. There are many restrictions, so to see if you qualify call 888-995-HOPE.

Snag a lower credit card rate. Interest rates on credit cards have edged lower, just in time for holiday shopping. Borrowers with existing cards and a spotless payment history have benefited the most.

"Many credit card issuers had hiked rates for new cardholders in the late summer and early fall," said Justin McHenry, research director for IndexCredit Cards.com. "So all the Fed's cuts really did was to bring the average rates back down to where they'd been over the last year and a half or so."

Today, the average nonrewards card charges 14.22 percent.

If your interest rate is higher, call your bank and ask for a better deal.

You can shop for cards at IndexCreditCards.com, CardWeb.com, and CardRatings .com. The best rates are reserved for applicants with strong credit histories. Improve your chances by making on-time payments for at least six months and paying down your balances.

Keep high savings yields. Falling interest rates tend to push yields on cash accounts lower. So far, though, the effect has been minimal because of steady competition among banks for deposits.

So online savings accounts that once paid 5 percent may still offer yields of 4.5 percent or more. And you still can find certificates of deposit that pay 5 percent, though it may take some research. Dig up deals at BankingMyWay.com.

There is no guarantee, however, that these yields will continue. If you don't need your cash immediately, consider locking in with a certificate of deposit. Normally, the longer a CD's term, the higher the yield. But one-year and five-year CD yields are neck and neck, meaning banks may expect rates to stay where they are - or continue to fall.

"Evaluate your time horizon first," McBride said. If you have more than a year, he said, then remember this: "With a shorter maturity, you might not be able to reinvest at the same rates you see today."


Carolyn Bigda writes for Tribune Media Services.

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