The Federal Reserve yesterday cut the interest rate yet again to prop up the US economy. But what does this mean to consumer borrowing and saving? Here are some answers to frequently asked questions:
Q. Does the interest rate cut mean that now is a good time for homeowners to refinance?
A. Mortgage rates aren't directly tied to short-term interest rates, but now is a good time for people with good credit to refinance, said Michael Broad, a financial planner in Newton. The average interest rate on a 30-year fixed loan last week was 5.6 percent, according to the Mortgage Bankers Association. Rates are at levels last seen in 2004.
"So if someone has had their mortgage for a while and has good credit, they might want to make a few phone calls," Broad said. "If the rate is an improvement, then you want to ask what it is going to cost for you to get into that loan."
Cheryl Costa, principal adviser at Family Financial Architects in Natick, points her clients to no points, no closing cost mortgages. "That way, if a lower rate comes along in a very short period of time, it's a no-brainer to refinance," she said.
For homeowners with adjustable rate mortgages, low fixed rates present an opportunity to refinance out of the ARMs and avoid costly resets later on, said Greg McBride, senior financial analyst at Bankrate Inc., a firm that tracks US interest rates.
Q. The Fed is expected to cut rates again. Will mortgage rates fall further?
A. Not necessarily. Mortgage rates are tied to long-term bonds, and investors may have already priced in future rate cuts. Home equity lines of credit, frequently used to finance home improvements, however, are tied more directly to short-term rates and will more closely follow changes in the Fed's benchmark rate.
Q. Should the rate cut influence individual investment strategies? For instance, will certain sectors benefit from the cut more than others, presenting investment opportunities?
A. Investors should stick to long-term planning because the stock market is forward-looking and factors in future events like a rate cut, Broad said.
"By the time [the rate cut] comes to pass, it tends to already be factored into prices. Or the prices adjust very, very quickly, meaning that seconds after the Fed makes an announcement, the impact of that announcement will already be reflected in the prices," Broad said. "That's what I mean by the market being forward-looking. You don't get ahead by trading on information that everybody already knows or anticipates. For most people, this is just a dumb way to invest, because this is like short-term gambling. Investing is a long-term undertaking."
Q. What kind of impact will this cut have on credit cards?
A. When interest rates in the economy go down, credit card interest rates tend to fall slowly, if at all, Broad said. "Banks don't like to lower those rates, particularly with the possibility of a recession or the possibility of a weaker economy," he said. "Consumers would do well to reduce their borrowing, no matter what happens to interest rates in the short term."
Q. Rates on certificates of deposits, or CDs, will fall as well. Does that mean people shouldn't put their money there?
A. Conservative investors will have a hard time finding great or enticing rates on CDs, Costa explained. Those who invest in CDs are going to find that they might not get as good a rate as they did six months ago.
Costa advises investors who stay in CDs to do shorter terms. "They might have been doing one-year CDs to lock in the higher rates, but as interest rates come down, they should buy a 3-month term CD," she said. "Until we know more about where rates are going, it is better to use shorter-rate CDs."
Q. What impact will the cuts have on auto loans?
A. The Fed move could mean better rates on auto loans, but not necessarily, said Michael Kozak, director of wealth management from Cabot Money Management, a Salem firm that deals with high net-worth individuals. "I guess in theory [a rate cut] might make them cheaper, but it doesn't always work like that," he said. But, he added, "The rate cut isn't going to make a meaningful difference, not enough to sway the payment."
Q. How should consumers spend their rebate if the economic stimulus package is approved?
A. "The government would like them to go out and spend it," Broad said. "I would like them to pay down any credit card debt they might have."
Robert Gavin of the Globe staff contributed to this report.
