Federal Reserve policymakers dropped a key interest rate to the lowest level in history yesterday, but many consumers might well ask: What rate cut?
The Fed action could help those with home equity lines of credit and, indirectly, give needed relief to homeowners whose adjustable-rate mortgages are poised to reset.
But for many other types of consumer credit, from auto loans to credit cards, the rate cut might not translate to significant monthly savings. Many rates were low already. And at a time when lenders are more averse to risk and tightening credit standards, they probably won't pass a rate cut on to customers.
"It's largely window dressing," said Greg McBride, senior financial analyst with Bankrate.com.
The big beneficiaries are banks. Fed policymakers lowered the federal funds rate from 1 percent to a target range of 0 percent to 0.25 percent. This is the rate that banks charge each other for overnight loans.
The rate cut is designed to make lending profitable and attractive to banks so they are willing to lend money to individuals and business owners, said Keith Gumbinger, vice president of HSH Associates, a provider of mortgage information.
"Banks don't have a willingness to lend," Gumbinger said. But "if you're a bank and can get money on an overnight basis at no cost, you can go and lend it to somebody at some amount of markup."
For consumers, though, the biggest change from yesterday's action may be on adjustable-rate mortgages that will be resetting next year, McBride said. The federal funds rate does not directly affect ARMs, but it can influence those mortgages tied to short-term Treasury securities that move in anticipation of Fed action, he said.
Homeowners could see their new rate stay the same or go down.
For example, a borrower who has paid off $20,000 on a $220,000 five-year ARM that is now resetting could save $126 a month, McBride said.
"It will save a significant number of foreclosures," McBride said. "You're not going to see people getting decked with big payment increases like we saw a couple of years ago."
Consumers with home equity lines of credit tied to the prime lending rate also will benefit from the Fed's move yesterday. The prime rate is what banks charge their best customers and drops with cuts in the federal funds rate. Bank of America announced yesterday that it was dropping its prime rate from 4 percent to 3.25 percent.
Those seeking a home equity line of credit, though, likely won't benefit from the lower rate because many banks are unwilling now to extend such credit.
"Lenders are not jumping up and down to be a second-lien holder in a market where home prices are falling," McBride said.
Yesterday's rate cut won't directly affect fixed-rate mortgages. Rates are affected by market conditions and, specifically, investor demand for mortgage-backed investments, said HSH's Gumbinger.
"We haven't had any of that for a while," he said.
For the past couple of years, the rate on 30-year, fixed-rate loans under $417,000 ranged from 6 percent to 6.75 percent, Gumbinger said. After the Federal Reserve announced a $600 billion program to support the mortgage market last month, those rates dropped 1 percentage point, he said. Some borrowers believe rates could fall further, given the government's plans to bolster the housing market.
Variable-rate loans normally would be influenced by a cut in the federal funds rate. "But in light of present market conditions, that is unlikely to happen," Gumbinger said.
Credit card customers may be disappointed. The rate on fixed-rate cards won't budge.
Most cards, though, carry variable rates. The most creditworthy customers could see a drop in their card rate, but the savings may not be much. If you have a $5,000 balance and your rate drops three-quarters of a point, your annual savings is $38, McBride said.
Other factors also influence the rate on variable cards.
Some card issuers set a floor on variable-rate cards so costs won't drop below a certain point, said Bill Hardekopf, chief executive of LowCards.com, which tracks rates. Card issuers also set rates based on how risky you appear as a customer.
"They are quicker to the trigger in raising rates if you do anything to have your credit score go down and your credit risk go up," Hardekopf said.
That could be a late or skipped payment, exceeding your credit limit or using a higher percentage of your credit limit, he said.
Don't count on yesterday's rate cut to make a new auto much more affordable. Car loan costs don't move much, even when other rates fall, McBride said.
The average rate on a five-year new loan is a little over 7 percent, compared with 7.6 percent a year ago, he said.
The losers in all this may be savers. Rates on savings accounts and certificates of deposit are expected to continue to fall.
WHAT FED CUT MEANS FOR YOU
Adjustable-rate mortgages, home equity lines The Fed move indirectly influences ARMs, but homeowners with resetting mortgages could see their payments stay the same or go down; home equity lines likely will fall if you're lucky enough to have one
Customers with sterling credit could see a rate reduction; everyone else, not so much.
Interest rates haven't budged much in the past year; car-buyers won't likely get much of a break
Savings accounts, CDs The rates will continue to slide, but banks need deposits, so you still might get better returns than elsewhere.