Interest Rate Cuts May Mean Mortgage Changes

Wall Street players aren’t the only ones with a lot riding on whether the Federal Reserve cuts interest rates Tuesday - everyone could see dramatic changes.

Policy makers are widely expected to decrease rates by up to one-half of one percent, a move big institutional investors have been clamoring for in recent months.

For the regular family, a cut would lower credit card bills, make mortgages cheaper and perhaps inject some confidence into the stock market and revive ailing 401(k) investments.

Economists will likely debate until the 11th hour what the Fed will do when it releases its decision Tuesday afternoon. Even those far removed from high finance are nervous about what could be the biggest move in years.

“Customers have told me not to touch their home loans until the Fed meets,” said Darin Hardin, owner of California’s Coastal Hills Mortgage Inc.

“People have been assuming for six months that rates will go lower, and nobody wants to make a move until some kind of event happens.”

Hardin said his business has been slower in brokering California mortgages in Orange County, one of the nation’s hottest real estate markets.

New calls for mortgages aren’t coming in as frequently, and those looking to switch to fixed-rate financing from adjustable have been stalling.

• A cut in interest rates would quickly make fixed-rate mortgages cheaper.
• Homeowners with a home equity line of credit will pay less, and those “waiting on the fence” will have reason to pick up the phone.
• A whole host of other borrowings will also become cheaper as U.S. banks follow an interest rate cut by lowering their own prime rates.

For those that qualify, home loans spanning everything from automobiles to education will be affected - as will the amount charged for credit cards.

There’s also the potential psychological impact a rate cut would have on the stock market, where the Dow Jones industrial average has plunged into volatility after hitting an all-time high in July.

While a rate cut would likely give the markets a short-term boost, whether its effects on home loan rates would be long lasting remains unclear.

There are still plenty of economic challenges facing investors, with some economists believing the U.S. is heading into a recession.

Though a cut might help boost mortgages, it might do little to help the slumping housing industry. Stocks might rally if the Fed delivers.

However, it won’t help some of the underlying problems behind why corporate earnings are weakening. The bottom line? Stay tuned.

SOURCE: Yahoo! Finance via Associated Press