Fed’s Cut Rates to Unprecedented Low

Yesterday, the Fed lowered the federal funds rate rate to near zero in an attempt to bolster the sagging economy. The federal funds rate is an overnight lending rate that banks use to set rates for a variety of loans such as adjustable rate mortgages, credit cards, and home equity lines.

For many consumers with variable rate loans, they should see a monthly savings. For example, a family with a prime indexed home equity line of credit would see their interest rate lowered from 4.00% to 3.25%. On a $50,000 draw, their minimum monthly payment would decrease  from$167 to $135.  The same types of saving could be seen in variable rate credit cards however the effect may not be as pronounced since credit card rates have a higher prime plus index.

For the consumers who wonder if this is a good time to refinance their homes, the answer is not so clear. While the goals of the Fed is to lower long term interest rates, their recent moves only lowers short term interest rates. 30 year fixed mortgage rates are consider long term interest rates and often indexed to the 10 year treasury. While the rates on the 10 year treasury are also at historic lows, the credit credit crunch has more lenders charging higher premiums eroding the value of the historically low rates.

So what should you do in this environment to save money? Here are some tips:

If you have a home equity line of credit, consolidate your bills. If you have good credit and an open HELOC, consider consolidating your credit card bills and other expenses. With a prime rate of 3.25%, you will rarely get another opportunity to get such a low priced loan. The caveat is that rates may rise in the future so make sure you have flexibility to move debt around. You are also using your home at collateral so be careful.

Shop for credit card rates. Not all credit card interest rates are variable. If you have a fixed rate credit card from when prime was 6% or 7%, this could be a good time to look into a new card with a lower rate.

Stay on top of this market and interest rates. We are at an historically low interest rate period. As the Fed looks to unfreeze the credit markets, there could be unprecedented opportunities to refinance or purchase a home assuming you have good credit. This period won’t last forever so be savvy, stay on top of the market, and look for your opportunity to save.