Fed's rates cuts spur refinancing

By cutting the rates by 75 basis points in the middle of the night, the Fed is acknowledging the gravity of the situation. The impact those cuts will have on the economy vary depending on where one stands. Let's look at what three groups of borrowers may face in the immediate future.

Prime based loans:
Lenders usually respond to rates hikes or cuts by lowering the prime rate that forms the basis for consumer loans, equity lines of credit, car notes and credit cards. Those consumers will see their payments fall. Consumers may be motivated by low rates to take on new loans or refinance the old ones. The impact on these consumers will be positive provided that they believe that the market's decline is nearing and end. In a highly leveraged systems such as ours, the verdict is still out.

Long Term Loans.
This includes mortgages: these loans are affected by financial instruments such as bonds. When bonds prices go up, their yields fall and along with it, the interest rates. The current yield on the 10-year bond is around 3.33%, the lowest it has been in more than two years.
Bonds represent a secure investment and people tend to buy them in periods of uncertainty.

The interest rate on a conventional loan has dipped below 6%. Conventional loans are those that Fannie Mae and Freddie Mac are allowed to purchase. The maximum amount of these loans is $417,000 for a one unit property. (single family, townhouse, condo, loft, etc...).
Most borrowers could lower their mortgage payments by refinancing at these rates provided that they meet new lending guidelines put in place by wary lenders awash with loads of non performing loans.

Subprime Loans.
Consumers who have these loans may not easily benefit from falling rates for the following reasons: the equity in their homes varies from low to non-existent and their credit may not pass the muster of new guidelines. If those two conditions are met, refinancing will be a bonanza. Getting rid of high mortgage rates will bring needed relief to their cash flow.

In general low interest rates will spur refinancing for those who are ready, willing and capable to refinance and this will be good for the housing market and the economy at large.