The More They Rise, The More They Stay the Same

Just a few years ago the Federal Reserve was lowering interest rates every other month; now they are raising interest rates at the same rhythm. The interest rates that the Fed controls are the Fed Funds Rate and the Discount Rate. These rates are “short term” (overnight) rates that either the fed charges member banks or what banks will charge each other for overnight borrowing. When you read that the Fed has raised a rate, it is the Fed Funds Rate that is generally being reported. In the last year we have seen this rate rise from 1% to 3.5% in 10 consecutive “measured” increase of a quarter point each time.

Wow, isn’t that exciting (yawn). Now, what does this mean to you? When the funds rate goes up, so do all other short-term rate (interest rates charged for money borrowed under 1 year). This is the important part, when the funds rate goes up…..Prime rate rises also. The vast majority of home equity lines and credit card interest rates are tied to prime, so these rates have risen at least by that same 2.5% in the last year. The great deal you got on that home equity line a year ago when it was only in the mid-5% range is now in the mid 7% range and is expected to go to the mid-8 by the end of the year!

What is your out? If you don’t plan to pay off that equity line any time soon, then look at refinancing your first mortgage and paying off the equity line that way. After all, long-term rates for 15 and 30 year mortgages haven’t changed anywhere near that 2.5% rise of the Funds Rate!

Fixed rates for conforming loans (loans under $359,650) as of August 19, 2005 are:
(rates quoted are 0 point loans)
30 year fixed: 5.75% (APR 5.83%) payments are $2,098.82/mo.
15 year fixed: 5.375% (APR 5.51%) payments are $2,914.84/mo.