By now it is no surprise that the FED lowered rates by .75% today, in a move that shocked many people. It is the first time they have reduced rates between a scheduled meeting since the day the market opened after the September 2001 terrorist attack. They are scheduled to meet again on January 30 and most likely cut rates again by .25% to .5%.
What rates were cut?
The Federal Funds Rate, which is how much consumers pay on credit card debt, home equity lines of credit and auto loans. It is now at 3.5% (Prime is this + 3% = 6.5%).
The Discount Rate, which is what it costs banks to borrow directly from the central bank (now at 4%).
This was done to help prevent our economy from sliding into a recession, which some people already think we are in.
Who does this affect?
Builders will now have lower interest rates on their construction loans because most construction loans are attached to Prime.
Anyone with a HELOC will ahve lower payments now.
It will not automatically affect borrowers who are currently in the mortgage process. It is a common misconception that a rate cut like this will automatically drop your interest rate the same amount as the rate cut. Rates do not have to follow, but recently (since the September 2007 cut) rates have fallen. I think long term rates will continue to fall, making it a great time to be purchasing a home to live in or an investment property as a long term rental.
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