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Certificate of deposit yields are now the lowest in nearly two years, and mortgage rates are no lower than those seen in January. So how are consumers benefiting from continued interest-rate cuts? The good news was delayed, but at last, it's arriving -- in the form of falling rates on credit cards and home equity loans.
Despite three interest rate cuts in the first three months of the year, lower rates on variable-rate credit cards are just now coming into play because so many issuers re-price their cards on a quarterly basis.
Currently, the rates on variable rate cards are the lowest since June of last year, before the full effect of the Fed's interest rate hikes rippled through.
These rates are likely to continue dropping as more issuers complete their re-pricings.
Another expected rate cut in May would prolong the trend of falling credit card rates into July.
Though credit card rates are falling, they are not the best source of financing for consumers who are carrying big balances. Their interest rates -- currently averaging 17 percent -- make them an expensive form of borrowing. Plus, you can't deduct credit card interest on your taxes.
For homeowners possessing sufficient equity, there is an alternative -- and one that has become a better and better deal over the past six months.
Home equity product rates are at their lowest point since 1999.
Consumers consolidating credit card debt into a home equity loan can, on average, cut their interest costs almost in half, and have the possibility of deducting interest on home equity loans from their taxes. For those able to do so, the after-tax cost of this loan is even lower.
Home equity products come in two varieties -- the fixed-rate home equity loans and variable-rate home equity lines of credit (HELOCs).
Both are now declining, but for some consumers, the variable-rate line of credit is a prudent choice in this declining-rate environment. Locking in a fixed-rate home equity loan now locks in that rate for the term of the loan -- regardless of how much further interest rates drop.
On the other hand, a variable-rate product can work to a borrower's advantage because the rates continue to drop as the prime rate declines. Further interest rate cuts by the Federal Reserve Board are still expected -- and they will continue to benefit these borrowers.
However, this can be a double-edged sword as the rising rate environment of 12 months ago illustrates. Just as variable rates drop in a declining-rate environment, they increase in a rising-rate environment.
This is an important consideration for borrowers who expect to carry a large balance and take a number of years to pay it off. They may unwittingly subject themselves to the whims of the interest rate cycle in future years.
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