January 22, 2008 - Heated selling in European and Asian stock markets on Monday led to broad market losses which many feared would lead to a significant drop in the Dow Jones Industrial Average today. By the time European markets opened for trading on Tuesday, Dow Jones Futures were down 650 points. But within an hour of the time American markets opened up, the FED announced a massive rate cut of ¾%. It's the largest single cut in rates in 24 years and it helped to stabilize the Dow Jones today. The cut may help lower both credit card bills and mortgage rates for those with adjustable rate mortgages. But it may provide little help to anyone looking to refinance an existing loan or wanting to purchase a home.

Today's rate cut drops the benchmark FED Funds rate to 3.5%, and the prime rate to 6.5%. Since many adjustable rate mortgages are tied to the prime rate, the drop will actually help reduce monthly mortgage payments for some borrowers.

The FED also dropped short term interest rates by the same ¾% point. This drop will reduce monthly minimum payments on credit cards.

All of this is good news for financially strapped borrowers, but it will not help everyone. Those holding subprime mortgages may get some relief from increased interest rates, but they may still find it impossible to refinance into a new home loan. The reason for this is that many lenders have significantly tightened their lending criteria. This means that there are very few loans available to those with low credit scores or who have little or no equity in their homes.

Another factor that is limiting the ability of homeowners to borrow is the fact that in most areas of the country, real estate prices are falling. This reduces the amount of equity that people have in their homes and may make it impossible for them to qualify for a new loan.

Some lenders are also getting out of the subprime market all together. Bank of America stopped doing subprime loans in 2001. The company has said that once it completes its acquisition of Countrywide, the nation's largest home mortgage lender, it will stop offering subprime mortgages through them too.

But consumers who have good credit and at least 20% equity in their homes should seriously consider refinancing now if they can. Home mortgage rates are near historic lows for qualified borrowers.

Consumers with high credit card debt may also be able to take advantage of current market conditions. If the minimum monthly payment on credit cards is reduced, those who can afford to do so should still try to make the higher payment amounts. This will allow them to pay off their credit card debt more quickly and become debt free.

by Jim Malmberg

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