Borrowers Reap the Benefits of Shrinking Rates

How much effect the Federal Reserve’s latest interest rate cut will have on the U.S. economy is debatable, but this much is clear: The central bank’s 2 1/2-year rate-cutting binge has sharply improved the financial lot of millions of American borrowers.

Just ask Thomas Edison Gomez. Partly because of falling credit card interest rates, the 53-year-old Highland Park resident paid off much of his $18,000 in plastic debt.

“I’ve gotten it down to about three or four thousand on just a few cards, and I’m getting rid of all the others,” he said. “It feels great.”

The same holds true for Jerry Warren, 44, who recently refinanced his Pleasanton, Calif., home with a 5.25% mortgage -- cutting his monthly payment by $1,000. “You are not so afraid that you’re not going to be able to make the house payment anymore,” said Warren, who was on a binge of his own Wednesday at the Glendale Galleria.

His interest rate savings have turned into new appliances and draperies for his home -- luxuries that he had put off since the beginning of the economic downturn.

Silver Lake resident Suzanne Davis, 40, capitalized on low rates on auto loans when she traded in one of her family’s two SUVs for a new car. “It’s been a good year,” she said.

Jan Davis, president of a Chicago credit information firm called TrueLink, said the effect has been “pretty phenomenal.”

“These are rates that most of us haven’t seen in our adult lives,” she said.

Indeed, when the Federal Reserve cut the federal funds rate by a quarter-percentage point Wednesday, it brought the key benchmark to its lowest level since the 1950s.

Consumer rates are not directly tied to what the Fed does. However, since the Fed began cutting rates in January 2001 to revive the flagging U.S. economy, banks have steadily cut their prime lending rates.

That has pared the cost of everything from credit card loans to home equity lines of credit. But it has been the dramatic swoon in mortgage rates that has really goosed consumers, especially in Southern California.

The cost of a 30-year fixed-rate mortgage has plunged to an average of 5.44% from 8.39% in June 2000, according to HSH Associates, a rate-tracking firm in Butler, N.J. That translates to a 26% cut in borrowing costs, with the payment on a $100,000 loan dropping to $564.03 a month from $761.13.

But not all the news is good. While borrowers reap benefits from low rates, savers -- particularly retirees who live off the income from their savings -- suffer. With each rate cut, they have found their investment options looking increasingly bleak.

Yields on money market accounts are so low that fund companies are cutting fees just to keep returns in the black. Many retirees complain that has forced them to cut back.

Lancaster retiree John Wall and his wife, Mary Jane, paid off their home long ago and don’t carry a balance on credit cards. For the Walls, falling rates are nothing to celebrate.

“When you reach the point when your investments are greater, by far, than your debt,” Wall said, “higher interest rates are better.”

Gary Schlossberg, chief economist at Wells Capital Management in San Francisco, agreed.

“Lower rates are a double-edged sword,” he said. “They help borrowers and hurt savers.”

And for consumers in the home-buying market, the payoff can be striking.

Elisa Hawkes, a 35-year-old secretary from Pasadena, used to look longingly at new housing developments, wishing that she could afford a home.

Now with mortgage rates near generational lows, she is buying a home under construction in Moreno Valley.

“We would look at new home developments and say how we wished we could do that,” she said. “We never could until now.”

Meanwhile, some consumers are using the low rates to whittle down their debt.

Donna Branch-Cottrell, a 45-year-old ABC News employee, said she refinanced her Glendale home twice in the last 18 months.

During the last round, she was able to cut 15 years off the repayment time without raising her monthly payment.

Jim Armitage, a Pasadena insurance broker, is another serial refinancer who has seen firsthand the benefits of the Fed’s rate cuts.

“Lower rates have had a dramatic impact on me by putting more money in my pocket,” he said.