Today MarketWatch.com is reporting that a half-point cut in the Fed Funds rate is likely to happen this Wednesday. This will follow a three-quarters of a point cut that happened just less than a week ago on 1/22/08. If the half-point cut goes through, the Fed Funds rate will be reduced to 3%.

The reduced Fed Funds rate will likely have an impact on the Prime Rate, reducing it by the same amount. This could translate into lower rates on which businesses can borrow capital, and hopefully will increase profitability, growth, and expansion. The lower interest rate should also have an effect on the interest rates you pay on your ARMs, student loans, HELOC rates, auto loans, and credit card interest. On the downside, this also means that the interest rates paid by savings account may yet be headed for another drop. So much for my high interest savings account with HSBC…

The possibility may also exist for mortgage rates to drop lower in the coming weeks. Today bankrate.com is reporting the rate on a 30yr fixed mortgage to be at 5.47%. This is an excellent rate, and it may be worth refinancing your home if rates drop even lower. Currently I have my 30 year mortgage at a fixed 5.625% rate, but if I can end up getting a rate lower than 5% then it may be worth refinancing. In the next week or two I will most likely call my mortgage broker to see what rate I can qualify for and what the fees would be to refinance. If you’re currently paying a rate in the 6.5% and higher range, I’d say to give your mortgage broker a call now to see if refinancing would save you any money. You may want to hold off from making any final decisions though until you find out what exactly happens with the Fed Funds rate and determine how that impacts the prime rate. This may take a couple weeks or so to play out.

To determine if refinancing is worth it, simply ask your mortgage broker to tell you how much your payment would be at the new rate, and have them give you the total amount you’d pay in points and fees to refinance. Divide the total amount that you’d pay in fees by your monthly savings, and this will tell you how many months you’d have to live in your house for the refinance to have saved you money. If you are planning on staying longer than the number of months that you calculate, then refinancing could be a good deal for you. For example, if you will save $50 a month by refinancing, and your total refinance cost is $2,000, then you’d have to stay in your home for another 40 months to break even. If you plan on staying longer than that, refinancing can save you money.

Remember, this savings calculation only holds true if your interest rate is held constant. If your rate would adjust, as in the case with ARMs, then you’ll have to factor in estimates for the future rate changes. I’d recommend that if you are in an ARM to at least look at your options to see if refinancing into a fixed mortgage now would make sense given your individual situation.

Take care, and keep searching for those money saving opportunities!

The Money Kings

Keywords: fed funds rate, prime rate, HELOC, loans, mortgage, refinance, points