Fed Drops Key Interest Rates

What Will The Federal Reserve's Decision Do To Home Equity Rates?

The Federal Reserve voted to cut the fed funds rate (short-term interest rates) by a half-percentage point to 4.75 percent. It was the first time the central bank had cut the fed funds rate since June 2003. They also cut the discount rate by a half percentage point to 5.25%. A posting on the Inman News blog indicates that National Association of Home Builders expects more short-term rate cuts by the Fed this year, with quarter-point cuts in the federal funds rate at the Fed's Oct. 31 and Dec. 11 meetings.

The Fed drops key interest rates and home equity rates for loans and credit lines are affected positively.

The fed funds rate has stood at 5.25 percent since June 2006, as the Fed has sought to balance inflationary pressure with the threat of an economic slowdown sparked by the housing market collapse. But the recent rise in mortgage defaults and the tightening of credit have raised expectations on Wall Street that the central bank had to cut interest rates to help protect the economy and to keep financial markets stable.

"The forest fires in the economy had been spreading rapidly in the July-August period, and the Fed has recognized that it is going to take more than just a few buckets of water to bring this situation back under control," said Brian Bethune, U.S. economist at Global Insight. Since mid-August, financial market conditions have worsened. The cost of credit has soared and its availability has been limited.

Will the recent Federal Reserve Decision have any effect on homeowners? If so, what and who will the recent rate .50 interest rate cut have an impact on?

For people with home equity lines of credit (HELOCs), the savings of a half-point lower rate can over years represent hundreds, even thousands of dollars. This could be a good time to refinance HELOCs.

Other borrowers who should see immediate benefits from the Fed cut are those holding loans tied to U.S. banks' prime rate. Consumers can contact their lenders to inquire how their 2nd mortgage rates are calculated. Many banks cut their prime rates by half a percentage point after yesterday's Fed move. So, now may be the time to consider fixed rate refinancing of your 2nd mortgage loan.

Borrowers looking for a new fixed-rate home-equity loan (second mortgage) could also see lower rates, which could be an excellent way to cash out on your home's equity to pay off adjustable rate debt. There are likely to be regional differences, with lenders most likely to cut rates on these loans in areas where the housing market is healthy and the local economy is robust, says Doug Duncan, chief economist of the Mortgage Bankers Association. Before the Fed's latest move, rates on home-equity lines averaged 8.72%, while home-equity loans averaged 8.29%, according to HSH Associates.


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