The rate cut's winners and losers

By Bankrate.com

When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Is my credit card company going to sock me with another rate increase?

Bankrate has looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser.

Winner: People with good locked rates

When the Federal Reserve cut the federal funds rate dramatically in January, many soothsayers speculated that mortgage rates would plunge in response.

Instead, mortgage rates actually rose significantly, reminding everyone that changes in the federal funds rate do not directly control the direction of mortgage rates.

Now that the Fed has cut rates by three-fourths of a percentage point, it's anyone's guess where mortgage rates will go. But Richard DeKaser, chief economist for National City Corp., is betting the cost of carrying a mortgage won't be going down substantially anytime soon.

"We've seen the lowest for mortgage rates," he says. "We're going to be in the range of 6% for the balance of the year."

Time may prove DeKaser right. If so, consider yourself a winner if you locked into a mortgage before January's rate cut, when mortgage rates were near historic lows.

Winner: Homeowners whose loans are about to reset

The Fed's rate cut won't directly affect people with fixed-rate mortgages. But it will lower the payments of most homeowners with adjustable-rate mortgages.

This will be a boon for countless Americans with subprime mortgages who fear their next reset could leave them facing foreclosure.

"The Fed's actions in their own right are going to reduce the burden of mortgage resets," DeKaser says. "So that will help directly."

Loser: Fixed-rate mortgage shoppers

Way back in January, times were good for people shopping for a mortgage. Mortgage rates were near historic lows, making it cheaper to borrow.

Of course, not everything was rosy. The U.S. credit crunch and falling home values made it difficult for some borrowers to take advantage of sinking rates. Nonetheless, many homeowners and homebuyers had a window of opportunity to lock into historically low borrowing costs for many years to come.

For now, it appears that window has slammed shut, leaving those who failed to act earlier feeling like losers.

Take action: The Federal Reserve slashed the federal funds rate dramatically in late January. How did mortgage rates respond? They rose, fast and furiously.

The moral of the story is simple: Don't make mortgage decisions based on Fed actions, such as this week's rate cut. Instead, take the appropriate action given your individual circumstances.

"Trying to time the market is historically a fruitless exercise," says Bob Walters, chief economist at Quicken Loans. "If it saves you money to convert your ARM or to lower your fixed rate, then by all means do so."

Winner: HELOC holders with good credit and stable home values

Rates on home equity lines of credit will continue to drop in coming weeks, thanks to the Federal Reserve's decision to cut the federal funds rate to 2.25%. Although it's best to stay debt-free during tough economic times, people with HELOCs who absolutely need to borrow will find it cheaper to do so.

That is, unless their credit line has been frozen.

Loser: Other HELOC holders

Lower borrowing costs don't mean much if a lender freezes your ability to access funds. Unfortunately, that's happening to many homeowners. If home prices are sinking in your neighborhood, your equity line may be living on borrowed time.

In addition, homeowners with shaky credit are having a much tougher time getting HELOCs than they would have a year ago. The subprime fiasco has left lenders of all stripes extremely leery of lending to all but the most creditworthy borrowers.

"The whole continuum (of lenders) saw what happened when you get too lax, saw what happened when you make mistakes," says Bob Walters, chief economist at Quicken Loans. "At some point in the future we'll make mistakes again, but it could take decades. The memories will be fresh on this for a while."

As a result, lower HELOC rates will remain frustratingly out of reach for those with bad credit -- possibly for many years to come.

Winner: Home equity loan shoppers

Home equity loan rates have been trending downward in recent weeks after months of hovering around the 8% mark. Recently, they sank to their lowest level since the spring of 2006.

A cut in the federal funds rate may or may not send those rates lower. But for now, people are winners if they can find lenders willing to offer a home equity loan despite the credit crunch.

Take action: Home equity products are tax-deductible, making them an attractive way to borrow. Declining rates make them an even better alternative to credit cards and other forms of credit.

However, the best move in a stormy economy is to leave home equity untapped. Instead, tighten your belt and wait for a sunnier day before borrowing.

Continued: Auto loan shopping advice

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