Tuesday September  18, 4:48 pm ET
By Emily Brandon

Mortgages, home equity lines of  credit, auto loans, credit card rates, certificates of deposit, and money  market accounts can all be influenced by changes in short-term interest rates  set by the Federal Reserve. But don't count on getting a lower interest rate;  first, read the fine print in whatever contract you're signing. The only  interest rate that will automatically drop is the federal funds rate, which is  what banks charge each other on overnight loans. Here are some ways to make  the most of the rate cut announced by the Fed Tuesday:  

Watch the  market for lower rates. The Fed's rate cut should provide  a measure of relief to borrowers anticipating rising payments on their  adjustable-rate mortgages. "Borrowers facing resets will still see a sizable  payment increase compared to the initial payment when the loan was initiated  several years ago, but that increase will be substantially lower than it would  have been had the Fed not changed interest rates," says Greg McBride, a senior  financial analyst with Bankrate.com. The savings won't be huge, though. "If  your adjustable-rate mortgage is due for a reset in October, you're going to  see some benefit right off the top, so instead of jumping to 7 percent, it's  going to jump to 6≤ percent." But many adjustable-rate mortgages are not tied  directly to the prime rate, which is affected by the Fed's federal funds rate.  "A reduction in the prime rate may not affect their payment at all or may not  affect it for some time," warns David Jones, president of the nonprofit  Association of Independent Consumer Credit Counseling Agencies.  

Switch to a  fixed rate. It might be a good time to  consider converting to a fixed-rate mortgage. "Switching to a fixed rate would  be a great idea, particularly if you can refinance and your adjustable-rate  mortgage is still adjusting higher," says Mark Zandi, chief economist at  Moody's Economy.com. Thirty-year fixed-rate mortgages dropped to 6.25 percent  this week, down from 6.42 percent last week in anticipation of the Fed rate  cut, according to the Mortgage Bankers Association. "You may want to wait a  little longer because you'll probably get an even better deal sometime between  now and the end of the year," says Zandi. But be sure to carefully weigh the  effect of closing costs and fees before refinancing. And try to avoid late  payments before you make changes, as even a single late payment can make it  much more difficult to refinance and lock in a lower rate.  

Tap home  equity. "You will see lower home equity  lines of credit because they're tied to the prime rate, so they'll come down  one for one," says Zandi. If you can tap into your home equity to pay off  higher-interest credit card debt, there are savings to be had. But watch rates  closely before you sign up for a HELOC. "If you have a home equity line of  credit, your rate will adjust lower following a Fed rate cut, but it often  comes with a lag of one to three months," cautions McBride.  

Switch credit  cards. "Consumers should shop around  and look for credit cards where the rate is tied to short-term interest rates  and see if they can take advantage of that," says Gus Faucher, director of  macroeconomics for Moody's Economy.com. Although credit card rates are heavily  influenced by your own credit history, now is a great time to shop around for  the lowest-rate card and aggressively pay down debt. "If it's a variable-rate  credit card, chances are pretty good your rate will come down. With a  fixed-rate credit card, it probably won't," says McBride. "If you consolidate  onto a variable-rate card, you can do that now because as variable rates  decline you will get that value."

Keep  saving. Although borrowers may be  getting a slightly better deal in the coming months, savers who sock money  away in money market accounts and bank-issued certificates of deposit may see  their interest rates decline. "Banks are going to be quick to lower their  deposit rates, in part because they don't need the deposits because they are  not making as many loans," says Zandi. With interest rates now topping 5  percent at many financial institutions, stashing your cash in a CD is one way  to lock in high interest rates before they drop. "If you've been looking for  an opportunity to put money into a long-term CD, now is the time to do it  before rates decline," says McBride. But even if rates drop, risk-averse  investors may still want to stick with these safe savings vehicles. "If  interest rates fell 1 full percentage point, you're still looking at money  market accounts or CDs at 4 percent and 4π percent," says McBride. If you have  $10,000 to invest, the latter rate will yield you $425 interest earned per  year.

Edwin  K. Shandrew

Shandrew and  Associates
79 Cape Victoria
Aliso Viejo, Ca  92656
Home 949 716 8784 Cell 949  466 5633  Fax  949 258-5650  

edshan@cwnet.com

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