The Fed Rate Cut: How Soon Will It Affect You?

The Federal Reserve has cut interest rates by 50 basis points. What do you need to do about it, and how soon will the cut affect your finances?

Mortgages:

How Soon Could It Affect You?

Impossible to Know

Federal Reserve cuts in the federal funds rate have an unpredictable effect on long-term mortgage rates. So it's impossible to know for sure when -- or even if -- rates will fall as a result of the Fed's rate cut.

Fixed-rate mortgages usually do not change in response to cuts in the federal funds rate. However, adjustable-rate mortgages may be more sensitive to Federal Reserve rate decisions.

Depending on the exact nature of their mortgage, some people with ARMs may see their rate adjust downward the next time the mortgage resets.

Conclusion:

It's impossible to know when -- or even if -- fixed-rate mortgages will fall given the Fed's most recent trim to the federal funds rate. However, it's possible that some homeowners with adjustable-rate mortgages will see lower payments the next time their mortgage rate resets.

Home Equity:

How Soon Could It Affect You?

1 to 2 billing cycles

The Federal Reserve's decision to cut rates by a half-point eventually will mean lower borrowing costs for homeowners who have a home equity line of credit.

Most home equity lines of credit are indexed to the prime rate, a common benchmark for consumer and business loans set by banks. The prime rate moves in lock step with the federal funds rate.

However, don't necessarily expect your HELOC rate to drop overnight. In some cases, it may take one or two billing cycles before consumers see borrowing costs fall.

Rates on new home equity loans are trickier to forecast, as they do not move in lock step with the federal funds rate. In addition, people with existing home equity loans will not see their borrowing costs fall, as rates on these instruments remain fixed.

Conclusion:

The Federal Reserve's latest interest rate cut means you can expect HELOC rates to fall soon. It may take one or two billing cycles before you see the benefits.