Borrowers benefit as Fed lowers rates

Zero bank interest rate could make home loans more affordable.

By Marcie Geffner – December 19, 2008

Homeowners jumped at the opportunity to refinance their existing mortgages this week after the Federal Reserve lowered two key interest rates, one to a new record low of zero.

The Fed lowered the federal funds rate to a target range of 0 to 0.25 percent, the lowest level on record for at least the last 40 years, and the discount rate 0.75 percent to just 0.50 percent. The federal funds rate is the rate banks charge one another for overnight loans. The discount rate is the rate the Fed charges banks for short-term loans.

Rates may stay low

Mortgage interest rates had already fallen to extremely low levels, yet managed to slip even a bit more after the Fed's action.

The interest rates set by the Fed aren't the same rates that borrowers pay for home, auto or consumer loans. But the Fed's actions indirectly affect how affordable those loans are for borrowers. The latest rate cuts look like a sure sign that the Fed is committed to keeping interest rates low.

How will borrowers benefit?

Lower mortgage interest rates are a boon for homeowners who want to lower their monthly mortgage payments or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Homeowners who refinance now can take advantage of 30-year fixed rates that are hovering near historic lows. Homeowners who have an ARM or a home equity line of credit (HELOC) may also benefit from a lower rate on their existing loan.

Home buyers can benefit from low interest rates as well. Today’s low rates mean buyers may be able to qualify for a mortgage with lower payments or a higher loan amount.

Fed aim is economic growth

Going forward, the Fed intends to support the functioning of the nation's financial markets and stimulate the economy through low interest rates and other actions. Specifically, the Fed plans to purchase mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac to support the mortgage and housing markets. The Fed also will evaluate other actions that might also boost economic activity.

Indeed, the Fed said in its statement that it will "employ all available tools" to promote economic growth and keep prices stable. That determination should benefit borrowers in 2009.

© 2008 LendingTree, LLC. This story, "Borrowers benefit as Fed lowers rates," is reprinted by the author with written permission of LendingTree, LLC.