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

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.

Bloomburg reports:

“For homeowners, froth came in the form of home equity. As it was seen as easy “money on the house,” this bubble-inflated bonanza was mostly cashed out. Now millions are tapped out in their credit and savings kitties…

Greenspan, who wrote a 2007 report with economist James Kennedy on home-equity extraction for the Fed, found that American homeowners pulled more than $800 billion out of their properties, most of them going into even more debt to tap the bubble profits.

Now that the foam of a saucier time has gone flat, some serious debt reduction and saving are necessary.”

In 2005 Greenspan first spoke about housing “froth” before Congress. However, millions of home owners were so busy tapping out their equity via HELOCs, few took the time to listen.

See Also:

Inflation: Time to Rethink That HELOC?

5 Financially Sound Ways to Use a HELOC

A vast majority of lenders have made it more difficult for borrowers to qualify for HELOCs during the past three months:

“About 70 percent of domestic respondents—a somewhat higher fraction than in the January survey—indicated that they had tightened their lending standards for approving applications for home equity lines of credit (HELOCs) over the past three months. Regarding demand for these lines, about 20 percent of domestic banks, on net, reported weaker demand over the past three months.”

Many have also changed their terms for existing HELOC customers during the past six months:

“About 50 percent of domestic respondents reported having tightened terms on existing HELOCs over the past six months. Nearly all respondents pointed to declines in the value of the collateral significantly below the appraised value for the purposes of the HELOCs as reasons for tightening terms on these lines. Large majorities of respondents also cited increased defaults of material obligations under loan agreements, as well as significant changes in borrowers’ financial circumstances, as additional reasons for tightening terms on the existing HELOCs.”

For anyone following the mortgage crisis, none of this comes as a surprise. Fewer people are applying for HELOCs and fewer loans are being granted. However, HELOC lenders are continuing to advertise and credit-worthy customers have reported success in securing lines (now with lower interest rates, thanks to recent federal cuts).

See Also:

Which Lenders Are Freezing HELOC Lines?

Is the HELOC in Decline?

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?