Federal Reserve Rate cuts: How Will It Impact You and Your Money?

Yesterday, December 14, 2004….uuuhhh…wait…I meant yesterday March 18, 2008 the Federal Reserve lowered the Fed funds rate down 75 basis points to 2.25 percent. The reason why I mentioned December was because the last time the fed funds rate was this low was back in 2004 as you can see in the Federal Reserve Board: Monetary Policy, Open Market Operations chart.

I know you probably have read all the gloomy news in the newspapers, TV stations or perhaps you may have received calls from many mortgage brokers telling you that these great news will benefit you if you refinance now, but who is right and who is wrong?

Making the News

The truth of the matter is, as I mentioned in my post “Opportunity for Buyers in a Slow Real Estate Market,” sex and blood sells therefore some news reports will try to make bad news out of some news that need some dissecting in order to understand how they affect you specifically.

The lowering of the federal funds rate will in fact affect many if not everyone whether you are a homeowner or a renter, investor or borrower.

The Negative

First, let’s look at some of the negative effects lowering of the fed funds rate has on your money.

Although I am not a Financial Planner/Financial Advisor, I do have the basic understanding to know that if you are a saver, like many of us, and you have some saving accounts, CD accounts, you will receive lower returns since banks will only be able to offer lower rates for these accounts as a result of the lowering fed funds rate. Currently the going rate for a CD account, accoding to BankRate.com, could be anywhere between 2.25 percent to 3 percent depending on the investment terms. Compare that to the going rate almost 1 year ago when the going rate, I believe, was about 5.5 percent.

The Positive

Now, let’s look at some of the positive effects lowering of the fed funds rate has on your money.

Credit card holders may benefit because most credit cards have variable rates and they base their rates on the prime rate which is affected with every move of the fed funds rate. Greg McBride, senior financial analyst with BankRate.com comments that if you have a low balance, good credit score and history of timely payments, you could definitely be the beneficiary of a rate reduction by your credit card company on your accounts. But there could be some exceptions as your credit card account may have a “floor rate” in which case you may not see the rate drop in some cases.

Short term rates and the prime rate, as mentioned above, are affected by the fed funds rate cuts and they are used to calculate ARM loans and HELOC’s. Therefore, homeowners with an ARM loan that may have already adjusted or may be resetting soon and homeowners with HELOC’s may also benefit from the fed funds rate cut by observing a small increase in their payment and in some cases a reduction.

Buyers are also at the receiving end of the fed funds rate cut as they may find very attractive affordable mortgage payments for their new purchased home.

The (somewhat) Neutral

As I mentioned it on the “Interest Rates may Drop Lower” post, fixed mortgage rates don’t necessarily react positively to the fed’s rate cuts but they are still attractive and affordable for those who prefer long term safety. Simply put the rates for 30-year fixed loans are set by the investors that buy these mortgages in bundles called “mortgage backed securities.” Although the fed rate cuts make it cheaper for lenders to borrow money, these savings are not necessarily passed along to borrowers looking for 30-year fixed loans.

The Moral of this Story

Now that you know how the cut to the fed funds rate affects you and your money, you should take action.

If you have a money market account, you may be better off by consulting with your personal Financial Advisor or the bank of your choice as to what you can do with your money to get a better return.

If you have credit cards with variable rates, call your credit card companies and threaten them to take your business elsewhere if they don’t help you in reducing your current rate but make sure not to close your account. Obviously they will be willing to do so if you are a great customer with a good payment history.

If you are looking to refinance, do it with a long term ARM loan or even better a 30-year fixed loan.

But don’t make a decision to refinance or buy a home simply because the Federal Reserve cut rates, make that decision base on your individual situation. If you decide to refinance or buy a home, make sure that when you are sitting at the table with your mortgage broker, he/she explains to you the ins and outs, the pros and cons of every mortgage loan available to you. Don’t be afraid to ask, ask as many questions as possible, ask “why” your mortgage broker has chosen a certain loan over others and “how” he/she will be paid including the YSP because remember there are no free or low cost mortgages.

[youtube]http://www.youtube.com/watch?v=9u00h0zek0c[/youtube]

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And finally if at all possible, avoid and be wary of mortgage brokers that do loans via the mail, email, or over the phone. Many of these mortgage brokers use marketers who know nothing about the structure and the ins and outs of a mortgage loan as you will see on this next video.

[youtube]http://youtube.com/watch?v=qIFej3o_TJE[/youtube]

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March 19th, 2008 · Filed Under Credit Information, Mortgage - Loan Information

Comments

3 Responses to “Federal Reserve Rate cuts: How Will It Impact You and Your Money?”

Maskew on November 4th, 2008 11:17 AM

I would also add “Don’t Settle” This can be an ideal time to take advantage of lower rates. But you have to shop smart and above all don’t settle for a product on the basis of your credit score, age or size of down payment. Resist all the hype that you will not qualify for reduced interest rates soley on the basis of credit history. There are programs out there that help you qualify for better loan deals and reduced interest rates. Ask about them.
Also not all financial products are positively impacted by the fed cut. Work closely with your financial advisor and look for products that will in fact put you in position to establish a better credit standing while saving you money.
Ney on December 16th, 2008 8:47 PM

Maskew,

You summarized it all pretty well
Subprime Wolves are Howling About Mortgage Rates and the Fed Funds Rate Reduction : San Jose-Santa Clara County Real Estate UNCENSORED on December 17th, 2008 5:43 PM

[...] I mentioned it on a previous post, the lowering of the fed funds rate has positive and negative effects on your money. Therefore [...]