How Will Fed Rate Cuts Affect My ARM?

My ARM loan is due to adjust in February 2007. If the Federal Reserve cuts interest rates, how will it help me?

1 Answer

I am assuming you mean February 2008, right? Since the Fed did cut the discount rate by a total of 75 basis points, it will help homeowners who have home equity lines of credit. The discount rate affects the prime rate, which in return affects HELOC's. Why does it affect the prime rate? The prime rate is the discount rate + 3%= prime rate. However, it wont't affect mortgage interest rates. In fact, when the Fed lowers or increases the discount rate, mortgage interest rates tend to work in an inverse direction. We witnessed that on September 18, 2007 when the Fed lowered the discount rate by 50 basis points. The stock markets went roaring and investors sold bonds and dumped money into stocks. This affected the price of bonds, which affected mortgage interest rates.

Mortgage interest rates are based on mortgage backed securities or bonds. Their movement will have either a positive or negative impact on interest rates.