NEW YORK – Yahoo news, The price of money for American borrowers went on sale in a spectacular way Tuesday after the Federal Reserve cut interest rates to their lowest level on record and promised to keep them low for a long time.
In response, most banks reacted by cutting the rate they charge their best customers, known as the prime rate, to 3.25 percent from 4 percent. The last time it was that low was in 1955, according to data from the Federal Reserve Bank of St. Louis.
In short order, the move is expected to lead lower rates on existing adjustable-rate home equity loans tied to the prime rate. Federal Reserve statistics show that commercial banks hold $580 billion in revolving home equity loans on their balance sheets. Analysts said mortgage rates may also tumble below 5 percent , from the current average of 5.3 percent on Tuesday, as a result of the Fed's rate cut and its renewed pledge to buy up billions of dollars of mortgage debt. With rates that low, a new boom in refinancing is expected.
"Not only does it help in reducing the actual borrowing costs — home equity loans, credit cards and your auto loan — but it improves the affordability, so more people are eligible for credit because their interest payments are lower," said Brian Bethune, chief financial economist for Global Insight, a Lexington, Mass.-based forecasting service.
Lower rates — below 5 percent — are already available to borrowers with strong credit and hefty down payments. Those attractive rates, however, are only available to borrowers willing to pay add-on fees known as points.
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