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By Carl Surran

What Lower Rates Mean To You

Spring 2008

When the Federal Reserve drastically cuts interest rates, as it has done in recent weeks, it’s natural to ask: How does it affect me? What happens to my mortgage rate? Is this a good time to refinance? What about my credit card rates?

Although lending rates don’t drop in lock step with the Fed’s moves, they tend to drift lower as the Fed cuts.

The combination of falling housing prices and interest rate reductions present more affordable choices for homebuyers. It’s also a good time for homeowners with adjustable-rate mortgages to refinance to a fixed-rate mortgage that will lock in payments regardless of the future direction of rates. Homeowners with ARMs who plan to sell their homes soon may want to simply wait for mortgage rates to fall at the next scheduled adjustment.

Fed rate cuts also translate into lower rates on home-equity lines of credit, which typically are linked to U.S. banks’ prime rate (this is not true for home equity loan rates). Auto-loan rates should continue to fall gradually. Holders of adjustable-rate credit cards should benefit too, although card issuers can take as long as 90 days to pass along an interest rate cut to consumers.

It’s not all good news. Fixed-rate credit card holders are not likely to see any rate improvement. Rates on savings accounts, money market accounts and certificates of deposit drop when the Fed cuts rates. As lending guidelines tighten, borrowers may find it more difficult to qualify for a mortgage. And if inflation takes hold, low interest rates may not last long.

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