Thank You, Mr. Federal Reserve

November 14, 2007

As I discussed in a previous post, I’m now in the possession of a fairly large home equity balance in the form of a home equity line of credit (HELOC). Thankfully, I gained a little hope when Federal Reserve Chairman Ben Bernanke lowered the Federal Funds rate by .5% on September 18th, it’s first cut in 4 years. It only got better when it was lowered again on Oct 31st by another quarter point.

Now, to some, a half percent reduction in this rate may not mean a whole lot, especially if you don’t have a HELOC, which is one of the few financial instruments that is directly affected by this rate change. Other things is affects are short-term interest rate products like credit card rates, some car loans and adjustable-rate mortgages, like my HELOC. In retrospect, I’m glad I didn’t choose a regular home equity loan for this reason among others.

Anyway, because HELOC rates are directly impacted by any change in the Fed Funds rate, my rate dropped the .5% to 7.65% about 3 weeks after the announcement.

The result? My monthly payment is now lower by almost $60. Again, thank you Mr. Federal Reserve. Now will I do the right thing and keep paying that extra $60 so it goes directly toward the principal? I could, but I don’t think I will. The debt snowball method suggests that I put it toward a higher interest balance, like my credit card, so I can get rid of it quicker. After it’s gone, I’ll put that old payment toward my HELOC, which will go down much faster thanks to Ben.

photo by AMagill

Posted in Mortgage