How does the interest rate cut affect our economy?

We talked about hedging, buying insurance, and cost effectiveness in today’s class. We also discussed the relationship between the interest rate and mortgage loans. Just as the new tax cut policy, the new interest rate cut is going to affect each individual differently.

The Federal Reserve System lowered the interest rate by 75 basis points, which was 0.75 percent. The whole point of the interest rate cut is to slow down our economic recession process. Hopefully, it can give everyone a break and ease the crisis in the mortgage market. Like any other market, there are always winners of the situation, and there are also losers who suffer the downside. Experts predict that for borrowers who have a good credit history, the interest rate cut is beneficial. Borrows are still able to get a loan from a bank at a lower interest rate. These borrows are the market winners. For borrowers who have a bad credit history, the situation is worse. Borrowers are not able to refinance to pay off the debt. Their credit score will be taken into consideration very carefully. The possibility for them to be approved by the bank is getting lower and lower.

A credit card holder with a variable APR is more likely to see some decline in their monthly minimum payment. That makes them a winner. As an investor, seeing the interest rate decrease is a nightmare. They are taking a great loss on their shares. A home equity loan borrower is more likely to see the borrowing interest rate drop during the next month period, since the interest rate is based on the prime rate.

The interest rate drop can be good or bad. It really depends on the situation and the individual. A 75 basis points decline is a great relief for some people. In order to make the best of this situation, the smartest thing to do is to payoff your debt as much as possible. You are always better off without debt, rather than paying interest on borrowed money.

For more detailed information, please check the following websites:


http://finance.yahoo.com/loans/article/104266/Fed-Rate-Cut-Winners-and-Losers;_ylt=AvVC3FZitY0zMsb9Vva5AY67YWsA

http://www.mlive.com/business/index.ssf/2008/01/advisors_weigh_in_on_interestr.html