See: How to Negotiate the Best Home Equity Rates and Terms

The Associated Press explains:

“The Fed, as investors had hoped, announced a half-point cut in the federal funds rate, the interest that banks charge each other on overnight loans, driving it down to 1 percent, a low last seen in 2003-2004. That rate has not been lower since 1958 when Dwight Eisenhower was president.”

Most American home equity lines are based on the Prime Rate which, in turn, is tied to the Federal Funds Rate. Fortunate homeowners who have not received HELOC freeze letters may soon take advantage of these record low rates.

For a more in-depth explanation of how interest rate cuts affect borrowers, see: How Will Federal Rate Cuts Affect Your HELOC APR?

See Also:

How to Negotiate the Best HELOC Rates and Terms

Printable HELOC Comparison Worksheet

The New York Times reports:

“The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous…

Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.”

Major banks including National City, Wells Fargo, and Wachovia followed suit by lowering their prime lending rates to 4.5%. The prime rate is the rate that is given to the most credit worthy borrowers.

For more information on how this may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?

The Associated Press reports:

“Many believe the Fed will ratchet down a key lending rate to banks — now at 2 percent. In turn, the prime lending rate — now at 5 percent — for certain credit cards, home equity lines of credit and many other consumer and business loans — would drop by a corresponding amount.

Some believe rates could be slashed soon by as much as a full percentage point to 1 percent in hopes of encouraging people and businesses to spend more, thereby restoring confidence to the system.”

Almost all American home equity lines are pegged to the prime rate. A 4% rate for the most credit-worthy customers would definitely be something to talk about. The only problem - who’s left to qualify for these low rates? And, what banks are willing to offer such loans while cutting the lines on thousands of other customers?

See Also:

Will Federal Rate Cuts Affect Your HELOC APR?

How to Negotiate the Best Home Equity Rates and Terms

Today’s Prime Rate

A federal rate cut would have resulted in lower interest rates on most home equity lines of credit. Almost all U.S.-based HELOC rates are tied to the Prime Rate which, in turn, is pegged to the Federal Funds Rate. Generally, the Prime Rate is 3 percentage points above the Federal Funds Rate.

Current HELOC borrowers would have loved the extra relief. However, the Prime Rate is already at a relatively low 5%. Compare that to 20.35% in December of 1980 and 8.03% in September of last year.

For a more thorough explanation of HELOC rates and indexes see: Will Federal Rate Cuts Affect Your HELOC APR?

You may also be interested in the Federal Reserve’s list of historic Prime Rates.

Here are a few HELOC deals out there right now, as discovered by TheStreet.com:

• In Abilene, Texas, Bank of America is offering a rate of 4.99% on lines of credit between $100,000 and $300,000 (up to 80% LTV) with no annual fee.

• In Bradenton, Fla., GTE Federal Credit Union is offering a rate of 4.00% on lines of credit between $5,000 and $250,000 (up to 80% LTV) with no annual fee.

• In Garfield Heights, Ohio, Ohio Catholic Federal Credit Union is offering a rate of 3.74% on lines of credit between $5,000 and $50,000 (up to 80% LTV) with no annual fee.

Check with your local lenders - you may be surprised at what you can find.

See Also:

How Federal Rate Cuts Affect Your APR

How to Qualify for a HELOC 

Here are the national overnight averages calculated by Bankrate.com:

 $30,00

HELOC - 4.82%

HEL -  7.71%

$50,000

HELOC - 4.20%

HEL -  8.15%

As you can see, there’s a huge disparity. This makes it very difficult for borrowers to choose between the two loans. Do you want a low rate with the possibility of line freezes and rate increases? Or do you want a high rate with the stability of funds and a known monthly payment?

There’s no right answer, of course. HELOC loans tend to be a risky option right now, but some believe the risk is acceptable for the opportunity to borrow on the cheap.

See Also:

HELOC vs. Home Equity Loan

Is a HELOC Right for You?

Some analysts speculate that this latest cut will be the last for some time. The federal funds rate is already very low and further decreases could escalate inflation.

The official statement from the Federal Reserve seems to indicate that they will proceed with caution in regard to additional cuts:

“Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

The benefit for current HELOC borrowers may not be immediate. To learn more about how these rate cuts may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?

While HELOC rates are currently low, some analysts believe that inflation will eventually lead to higher rates in the future. Should this scenario hold true, borrowers with fixed interest rates will have the advantage.

Consider this example from TheStreet.com:

“Rising rates aren’t bad news for all borrowers. If you hold a long-term fixed rate loan, higher rates won’t affect your payments. What’s more, rising inflation will reduce the value of your monthly payments. For example, an inflation rate of 4% reduces the value of a $2,000 monthly payment to $1,643 in today’s dollars over five years.

By contrast, borrowers with variable-rate debt suffer from rising rates. Say that you qualified for a 30-year 3/1-year ARM (an adjustable rate mortgage whose rate is fixed for three years and then adjusts annually) at a rate of 5.5%. Your payments for the first three years would be $1,135 a month on a $200,000 mortgage.

A one percentage point increase in rates will boost your payments to $1,255 — and a three percentage point increase in rates could leave you with a monthly mortgage payment of $1509. That’s an extra $374 you’ll need to come up with each month, assuming rates don’t climb even further.”

HELOC borrowers may have the short term advantage, while those with fixed-rate home equity loans win out in the end. If you’re a HELOC customer worried about the possibility of inflation-related rate increases, you could refinance to a traditional home equity loan.

Alternatively, you may want to use your low-interest HELOC now and convert the withdrawn amount to a fixed rate when the market begins to shift. Not all HELOC lenders offer the conversion feature, however, and it can be extremely difficult to accurately time rate increases.
See also:

Home Equity Loan vs. Home Equity Line of Credit

Keeping track of the prime rate can help you decide when to withdraw money and estimate how much your monthly interest payment will be.

We’ve added a new feature that allows you to keep track of the current prime rate. The tracking page will be updated every time there is a change. Read more…