Your Mortgage: What exactly is affected when the Fed changes rates?

Mike Miles

By Mike Miles

Many of you are aware that the Fed cut rates again last week, but what exactly is affected, and to what extent, when the Fed changes rates? Maybe a better question is – why would the Fed would decide to lower rates to begin with?

The Fed will make a monetary policy decision (like increasing or decreasing rates) based on how the economy is doing or projected to do in the near future. If things look sluggish, the Fed may lower rates to help spur activity (consumers borrowing, purchasing, or businesses expansion), but if the economy looks strong, the Fed may increase rates to protect against excessive growth and possible inflation.

The most recent Fed rate decrease was 25 basis points to a target of 1.5 to 1.75 percent. So how exactly can we as consumers benefit from this?

  1. Credit cards

    Credit cards are tied to the prime rate which is the rate a bank charges its customers. When the Fed cuts rates, the prime rate is typically reduced by the same margin, so when that happens, credit card rates decrease.

  2. Home Equity Lines of Credit (HELOC’s)

    Home equity lines of credit are generally smaller loans collateralized by your home. For most borrowers, these loans are used for things like debt consolidation and/or home improvements. These loans can be short-term or stretched over several years, with rates tied directly to the prime rate. Just as with credit cards, HELOC rates will decrease by the same margin of change as the prime rate.

  3. Auto loans

    Auto loans are generally tied to prime rate as well. Borrowers of auto loans will benefit from lower rates if they buy a car after the Fed lowers rates. If you already have a car loan, your loan rate won’t change, however.

  4. Mortgage rates

    Your mortgage rate won’t benefit directly from the Fed reducing rates since rates are tied to the 10-year Treasury yield and not the prime rate. While it’s possible mortgage rates could decrease following a Fed rate cut, it’s not always noticeable. In most cases, the major indexes and treasuries already have fed policy expectations priced into the markets.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268