Rates Drop a Half Point: Who Will it Help

The Federal Reserve slashed the federal funds rate, by one-half a percentage point to 4.75 percent. The Fed Funds rate is the rate that banks charge banks for overnight loans to keep their loan ratios intact. A half point move is a big reduction and it indicates the Fed is taking the mortgage mess and the credit problems its created very seriously. This is a welcome move that will help the overall economy remain buoyant in the face of a real estate recession. It will help owners and borrowers quite a bit.

Lets take a look at who benefits. All loans tied to short term indexes will feel almost immediate relief:

Credit Card Holders: The rate reduction should show up on your next statement, reducing rates considerably

Variable Home Equity Lines of Credit: These rates are tied to short term rates and will see immediate reductions


Variable Mortgages/ARMs: The ARMs that are resetting now will not go up quite as much due to the recent reduction, but the increase may not be significant enough to everyone facing steep monthly increases.

Variables tied to short term increase such a ten year treasuries may see a help. Variable tied to the "LIBOR" or London Interbank rate will see little help. because it recently jumped sharply above the Fed funds rate because of the continuing credit crunch in the markets. "If Libor doesn't come down, there is no relief" for many mortgage borrowers, says James Bianco, president of Bianco Research LLC, a market-research firm in Chicago.

Fixed Rate Mortgages: New fixed rates will be slightly lower

Credit Cards: Almost immediate reductions in credit card interest rate charges.

The Fed hopes to help reduce the flood of foreclosures by helping lower the reset increases and to stimulate the economy by reducing the cost of credit. The next step is the consumers...they want us to spend and spend to help keep the housing recession from becoming a total economic slowdown. Although interest rates will be lower, the full extent of whether this will result in more home sales remains to be seen. Cheaper money will be offset by tighter credit rules and how that plays out is still an unknown.

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