Will Your Mortgage Catch a Break?

Last week, the Federal Funds loan rate — which determines banks’ overnight lending rates — was lowered to 4.75 percent.

The rate drop was designed to bolster the economy. Although consumer spending has remained relatively stable this year — despite a credit crisis and continued housing decline — banks aren’t so sure it will stay that way. Plus mortgage defaults have risen, making banks leery about loaning to each other.

All that nail-biting nervousness is bound to seriously affect consumer attitude at some point, which is obviously a concern. Just look at the near collapse of Northern Rock, Britain’s 5th-largest loan provider. Both the Bank of England and the government had to step in this month to bail out the strapped lender because panicked consumers refused to stop withdrawing their funds, the Financial Times reported.

The overnight rate in Britain shot up to its highest level in six years as a result — not because money was short, necessarily, but because people suddenly doubted the security of the entire British banking system. Hopefully, with the recent Fed move and steady consumer spending, that won’t happen here.

It’s been almost a week since the big announcement. Time to check in and see: What effects will it really have?

  • ARM Assistance — Homeowners with 30-year mortgages won’t see much difference. But adjustable-rate mortgage rates are affected by Fed decisions, so homeowners with very low-rate ARMs that are about to reset should see their monthly payments increase less than they would have before the rate cut. "It could mean a little less pain for the homeowner who is facing a
    reset on their adjustable mortgage rates," Greg McBride, senior
    financial analyst at Bankrate.com, told the Baltimore Sun.
  • Prime Rate Reduction — Last week, post Fed cut, a number of
    large banks — Bank of America and Wells Fargo included — cut their
    prime rate, giving their best borrowers a break in interest. Bank of
    America cut its prime rate  from 8.25 percent to 7.75 percent.
  • Home Equity Credit Costs Controlled  Those with home equity "open" lines of credit (HELOCs) will notice an immediate change because they are typically calculated by adding a margin to the prime interest rate, according to CNNMoney.com.
  • Plastic Punch-Up — Rates on credit cards should drop slightly, lowering minimum monthly payments, according to the Wall Street Journal. However, it’s important to note that many credit card companies won’t just offer you a lower rate — many will only give one if it is specifically requested.
  • Auto Action — Current car loan holders won’t notice a difference, but those seeking new car loans may get a better deal.

The rate cut takes time to affect the mortgage market — and it won’t help everybody. For one, homeowners already in serious trouble, facing foreclosure, aren’t likely to benefit enough from the rate cut.

Secondly, homeowners seeking "risky" loans may have a hard time renegotiating their ARM. Lenders aren’t
touching those riskier markets. For many who are due for a large ARM reset, making the new, higher monthly payments may be the only option (aside from default and foreclosure).

But for the other homeowners listed above, more help may actually be on the way. The yield on Treasury two-year notes to almost three quarters of a point below the designated 4.75 percent funds rate has led some government bond traders to predict the Fed will lower rates again this year to boost the economy, according to Bloomberg.

Has the Fed’s rate cut helped build faith in the U.S. economy? And will there be more cuts soon? Post your opinion below.