Interest-rate cuts: a slow stimulus

Short-term loans are already cheaper, but experts say it will take time before consumers benefit fully.

from the November 2, 2007 edition

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"We're not only decreasing the amount of monthly payment but we're also increasing the amount of principal you pay off," says Jim Dillon, CEO of Passport. "You are paying off a lot more of the boat when it's not appreciating in value, so that's really important."

The rate drop is a lot less significant for people carrying credit-card balances. According to the Federal Reserve, some 57 percent of cardholders have a variable rate that can rise or fall with interest-rate changes. The Fed also says the mean credit-card balance is $5,100 (the median credit-card balance is $2,200).

"For each individual it won't be a significant change," estimates Bill Hardekopf, CEO of LowCards.com, a free consumer website.

Mr. Hardekopf estimates that after the last two rate cuts the savings on a $5,100 card balance is $3 a month. "The Fed did not cut the rates so our credit-card bills will be lower," he says. "Besides, as the rates are dropping, [credit-card] issuers are finding other ways to make money, such as increasing the fee for cash advances or balance transfers [to other credit cards]."

Depending on their credit rating, the Fed rate cuts may have some favorable impact on people applying for mortgages or trying to refinance a mortgage. According to Bankrate.com, the 30-year fixed-rate mortgage has dropped from 6.25 to about 5.90 percent since August as the long-term bond markets reacted to and anticipated the rate cuts. Adjustable- rate mortgages are lower as well, falling over half of 1 percent. In September, a Mortgage Bankers Association (MBA) survey found the average application to refinance was asking for $241,300.

"If you are a prime borrower [the best credit score] and you are not asking for a jumbo loan [over $417,000], this is a really good time to borrow," says Orawin Velz, director of economic forecasting at the MBA. However, for jumbo borrowers, it can cost up to half a percent more to borrow today than earlier this summer. "It's not going to be in a normal state for a long time, people are repricing their risks," says Ms. Velz.

And, she adds, the interest-rate drop will not help people with subprime mortgages – mortgages for people with less than stellar credit. "They took out mortgages that had teaser rates that were really low," she explains. "Now there are tighter lending standards so the lower rates won't help those people."

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