Borrowers get small break from Fed
Those with home equity loans and lines of credit didn’t just hit the jackpot – but every little bit helps.
NEW
YORK (Money) — After the Federal Reserve’s half-point cut in interest
rates Tuesday, homeowners may experience some welcome – if small –
relief.
Borrowers with home equity lines of credit (HELOCs) will
notice savings immediately, says Keith Gumbinger, vice president of HSH
Associates.
A
HELOC works like a credit card – the homeowner can borrow up to a
certain amount during a defined number of years. The loan is secured
against equity in the home, and the homeowner pays back only what he
borrowed, plus interest.
Such variable-rate loans are typically
calculated by adding a margin to the prime interest rate, which is the
best lending rate available. "There is a lock-step relationship between
what the Fed does and the prime rate," explains Gumbinger.
A half
percentage point drop in the federal funds rate will likely result in a
similar decline in the prime rate, which stood at 8.25 percent before
the Fed announcement Tuesday. Leading banks quickly lowered their prime
lending rates to 7.75 percent.
But don’t expect a huge
windfall, said Greg McBride, senior financial analyst at Bankrate.com.
"If you have a $30,000 home equity line, a half point rate cut by the
Fed saves you $12.50 a month," he said. (At 8.25 percent, your minimum
payment would have been $206.25 a month on $30,000 loan; at 7.75
percent, it’s $193.75.)
(Credit card holders will probably see their rates drop, as well.)
Home
equity loans, which unlike HELOCs are closed-end loans with fixed
terms, will probably also see some downward pressure. "But there is no
immediate decrease," said Gumbinger.
The real impact of a
half-point drop for households is in mortgage products. "That’s true
for both fixed-rate mortgages and for adjustable rate loans," said
McBride. Some ARM rates are tied to one-year Treasury yields and
homeowners with loans resetting higher this fall could be facing rates
of 6.75 percent, rather than 7.5 percent.
"On a $250,000 mortgage, that’s a difference of more than $120 a month," said McBride. 
