What the Fed rate cut means

This morning, the Federal Reserve Board of Governors made an “emergency” rate cut today of .75% to the federal funds rate. (Federal Reserve press release.) The Fed, in addition to everyone else, seems to be worried about the state of the economy and the potential for recession.

But what does this really mean? If you already have variable rate loans, such as a home equity line of credit or second mortgage, those rates should drop along with the federal funds rate. Along the same lines, rates for home mortgages should be going down, as well. “Prime,” the benchmark mortgage interest rate, is not tied directly to the federal funds rate, but where the Fed goes, Prime follows. The Prime rate should be at 6.5%, and some believe it will go as low at 4% before the economy recovers.

Now is not the time to be taking out unnecessary loans. When the economy suffers, a lot of things become uncertain. While the coming months may be a good time to refinance if you were already planning on it, it is a terrible time to take on unnecessary expenses. And while it will be a good time to take out a mortgage, it may also be difficult to sell a house.

So watch the rates. If you have been waiting for a good time to buy a home, now is a good time, and it may get even better.

While you are thinking about finances, maybe it is time to ask your credit card company to lower your rate.