So the Fed Is Taking Action. How Will It Affect You?
Thursday, March 19, 2009
The Federal Reserve yesterday renewed its commitment to encouraging consumer lending by announcing steps aimed at helping push down interest rates.
Here are answers to questions about how those steps might affect consumers:
QI'm thinking of refinancing. Will the Fed's announcement drive interest rates lower?
ARates should drop slightly, said Keith Gumbinger, a vice president at HSH Associates. But keep in mind that the Fed's actions expand on a program it unveiled in late November. That program drove down the average rate on a 30-year, fixed-rate mortgage to the low 5 percent range. Rates have been bouncing around in that narrow range since then. Yesterday's announcement "suggests the Fed is making an enduring commitment to keep rates that low through the end of this year and possibly into next year," Gumbinger said. "But it's not as if tomorrow the average rate will go down to 4 percent with no points." Points are upfront fees borrowers pay to reduce the rate on the loan. A point is 1 percent of the loan amount.
Does it make sense to refinance if the rates go down?
Not always. It costs money to refinance a loan, and that cost may offset the savings. Some lenders charge points or require borrowers to pay for a new appraisal and title insurance, for instance. The drop in home values in many parts of the country adds a wrinkle. If you owe more than 80 percent of your home's value, you would have to pay private mortgage insurance on a refinance.
My adjustable-rate mortgage is about to reset. How will the Fed's announcement affect my new rate?
It won't. The Fed's actions today affect long-term interest rates. Adjustable-rate loans are governed by short-term interest rates. Your adjustable loan might adjust to a lower rate, possibly in the mid-3-percent range, if it is tied to the London interbank offered rate, or Libor, an index that measures what banks pay when they borrow money from each other for a certain period.
Is there any reason for me to refinance into a fixed-rate loan if the rate on the adjustable loan is lower?
Some consumer advocates say fixed-rate loans are a sensible choice for most borrowers given today's low rates because they are predictable. But keeping an adjustable-rate loan makes sense in some cases, especially if you plan on selling your home soon. In that case, it makes little sense to finance to a higher rate.
I'm ready to lock in a rate. But I'm worried that rates will decline later. Will I be stuck?
The lender is under no obligation to renegotiate unless you took an option specifying that. Some lenders offer that option upfront, but it will cost you. The cost would most likely be built into the rate you're quoted. For competitive reasons, some lenders will renegotiate even without such an agreement just to retain your business.
How will the Federal Reserve's action affect my credit card interest rate? And will it be easier for me to get a personal or small-business loan?
Like adjustable rate mortgages, consumer and small-business lending are unlikely to be affected. Interest rates for these loans are generally pegged to the prime interest rate -- which is already near zero -- rather than the long-term Treasury bonds that the Fed yesterday said it would buy. Instead, the Fed is in the midst of launching a $200 billion Term Asset-Backed Loan Facility, or TALF, that it hopes will provide relief to consumers when it is fully operational.
"If it is as effective as the last five months of talking about it indicates it will be, that will boost credit availability," said Greg McBride, senior financial analyst at Bankrate.com.