Prime Rate Drops

Today the Federal Reserve dropped the Federal Fund Rate by .75. This drop will affect Prime Rate by that amount as well.

I read an article earlier this morning about how the drop (which he says should be 1.25%) will not help the consumer which made sense as banks are tighter with their loans guidelines. But someone mentioned that their Home Equity Line of Credit (HELOC) interest rate would be less than their fixed rate mortgage. So there is some hope.

As the Fed Funds Rate drops so do Prime Rate and the LIBOR typically, which is how most adjustable rate mortgages set their rates. When I bought my first home in 2001 during the following years our loan payment actually dropped because the Fed Fund rate dropped 2% in a year, which is what happened this year so far.

This will help many either have a stable rate or even see a drop in their rate and payments. Adjustable rate mortgages and credit cards rates that are tied to these indexes may show some relief to the consumer.

UPDATE : Talking to someone high up in one of the big banks I got his take on this mess. Essentially a lot of the adjustable rate mortgages are tied to the LIBOR which is a London bank.  Because the pound is stronger than the dollar, but not great against the Euro, the LIBOR should be higher than the FED.  If that is true the interest rates on the adjustables will not reset as low as hoped in some cases.

Finally, interest rates, the Fed, LIBOR, gold and oil are all unknowns but affect the economy and no one can truly guess what is going to happen.  One genius who thought he knew a lot just lost $800 million by betting on Bear Sterns.