Yesterday, as you probably heard, the Federal Reserve Bank cut the key overnight interest rate by 75 basis points. The LIBOR (London Interbank Offered Rate) has also been dropping due to credit concerns. So, you may be wondering what this means for you. The answer is that it depends on how your finances are arranged.

Credit cards: You may see your credit card interest rate fall slightly, but probably not by much. This is one place where lenders can actually make money.

Mortgages: If your prime-rate, adjustable-rate-mortgage is pegged to a Treasury rate, the Fed rate cut could reduce your mortgage rate. Unfortunately, many loans are pegged to the LIBOR instead. This is especially true of subprime and ALT-A loans. Although the falling LIBOR may help some of them whose interest rates are resetting, the decline is too incremental to make a big difference in their ability to pay.

If you’re in the market for a new fixed-rate mortgage or a fixed-rate refinance, this cut is excellent news for you. Contact several lenders to find out their current rates and offers. They may ask you to jump through a few additional hoops, but it’s worth it if the home you want to buy is reasonably priced and you can lock-in a low rate. Nickel discussed the low mortgage rate he received just today.

Student Loans: If you have a variable student loan, you may or may not see a reduction in your interest rate. Like many mortgages, student loan rates are often now linked to the LIBOR.

Auto Loans: If you’re in the market for a new car, check out the different rates available. Although offers from dealers may not change much, your local bank or credit union may be offering a reduced rate.

Employment: The Fed rate cut was partially intended to encourage corporate borrowing. Lower rates make it easier for banks to find money to lend, and corporations are the largest borrowers. That said, a rate cut probably won’t affect your employment directly. Many experts aren’t predicting large lay-offs even if a recession does occur. Your employer may reduce spending on optional projects, but your job is probably safe unless you’re in the banking/housing industry.

Savings: The Fed rate cut does mean the interest rate on savings accounts, CDs, and other accounts will fall. If you have a CD that is about to expire, research your options carefully before rolling it over into a new one. You may find better vehicles for your savings right now.

Investments: If you’ve checked your portfolio recently, you know it’s hurting. The rate cut was intended to stimulate the market, but the experts I heard on NPR weren’t sure how effective it would be. They did say that it may have been enough to avoid a panic sell-off, but it probably won’t send anyone’s stock soaring. Monitor your investments, but don’t make any sudden moves if you’re investing for the long haul.

The Fed may cut the rate again in two weeks, but for now, continue your frugal habits and don’t stress about the fluctuations of the Fed.


3 Responses to “The LIBOR and Fed Rate Fall: What that Means for You”

  1. Lily on January 28th, 2008 3:36 pm

    As I understand it, you’re not entirely right about mortgages pegged to Treasury rates. The Fed cut short-term fed fund and discount rates. Mortgages are, for the most part, linked to 10-year Treasuries. Over time, the 10-year may fall as well as bond investors adjust to the new rate environment. But the Fed cut has no direct impact on mortgages tied to Treasury rates. (Mortgage rates started falling even before the rate cut.)

  2. Aryn on January 29th, 2008 9:51 am

    You’re right, Lily. Some mortgages are pegged to the 10-year Treasury, but home equity loans and HELOCs could be pegged to shorter-term treasuries. My research was conflicting on how the Fed rate cut would affect mortgages.

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