The Prime Rate Cut and Mortgage Costs

Posted by: Michael S. | Apr 10,2008

So we all know that the Fed has cut the prime rate to spur an economic recovery.  What this means is that people have to put the prime rate cut to good use: apply for a new mortgage and a new loan.  Unfortunately, people have been so frightened by the prospects of a drawn out recession that a lot of people just want to stand pat.  Hey, just consider it your patriotic duty, as the money you spend now will help the economy overall.  

Of course, I know people are not that selfless: they’re not going to go into increased debt just to help out the credit industry.  But that’s not what I’m talking about.  The cut in the prime rate can reduce your payments well spurring on the economy at the same time.  It’s win-win.  The catch?  Usually this is only a good avenue for people with good credit or better: a 720 credit rating and up.  

If you have a variable rate credit card or an adjustable rate mortgage, your rates are going to go down regardless.  However, this may take several months to go into effect so it’s recommended that you call up your lender or credit issuer to lower the rates as soon as possible – this could mean an extra couple of months of lower rates by having the paperwork expedited.

If you’re in the market for a mortgage, then now is the time to buy.  A few years ago people would have dreamed of a rate cut like this.  The difference was the economy was going stronger so more people were willing to buy.  All the talk about declining home prices may be giving prospective homeowners cold feet.  While it’s true that homes are not valued as highly in many regions throughout the country, this is definitely not a reason not to buy.  Even with home values lowered, the equity on the home will still be valuable, especially with interest rates lowered and more money going to equity.  You also need to think about the personal value of owning a home and the increased quality of life.

Just because there have been a rash of foreclosures on subprime mortgages does not mean that you will necessarily fall into the same boat.  You’ve got to look at your personal financial situation: in terms of your credit rating, available savings, housing market in your area, and interest rate.  What you potentially gain from owning a home in this climate can outweigh the nervousness you might have about buying a home during a recession.  

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