Question: Will lower interest benefit me/us?

A BuyandHolder

Answer:

Dear BuyandHolder,

The answer is, yes...it’s quite likely you will benefit in several ways from lower interest rates.

First, let’s look at what has happened and why.

This past week the Federal Reserve lowered the federal funds rate to a range between 0% and 0.25%. This is the tenth time it has cut rates in the past 15 months, in an attempt to revive the ailing economy.

The thinking behind lower rates is that consumers will spend more when borrowing money is cheap or cheaper than it was. (Federal funds are reserves maintained by commercial banks in the Federal Reserve System. The amounts are officially required. These excess reserves are available for lending to other banks, usually on an overnight basis.)

Most types of consumer loans, such as car loans, mortgages, credit card loans and the like, are pegged to the prime rate, which in turn is largely determined by the federal funds rate. Prime tends to be 3% higher than the federal funds rate.

And, in fact, shortly after the Fed announced its rate cut, major banks dropped their prime lending rate from 4% to 3.25%.

The not-so-good news

• Banks, faced with earning less money due to the lower rates, falling home prices and the glut of foreclosures, will be less likely to grant home equity loans or new mortgages except to those in solid financial shape and with good credit records.
  


• For a new mortgage, expect to make a down payment of at least 10%. For refinancing you must be able to show significant assets and steady income.
  


• Rates on bank CDs and money market mutual funds follow the fed funds rate. You can expect lower returns on these investments.
  


• The lower rate will weaken the U.S. dollar, at least temporarily. (International money gravitates to currencies that are regarded as safe and that offer high interest rates.)

The good news

• Variable interest rate credit cards will reflect the lower rate.

$Tip: You can track changing credit card rates at: www.CardWeb.com.

• Lower rates make it an even better time than just a month ago to take out a new mortgage.

$Tip: You can track changing mortgage rates at: www.bankrate.com.

• Lower rates also make home refinancing a better deal. And with this source of money, home owners can pay off other debts.
  


• Lower rates generally enable companies to borrow and expand. This will not only make publicly traded companies more attractive, it should also help revive the economy and create jobs.
  


• With rates on CDs, savings accounts and money market funds headed even lower, investors will turn to stocks, something which all BuyandHolders should be aware.