What the rate cut means for borrowers

The Federal Reserve's three-quarter percentage point cut in a key interest rate Tuesday was designed to make borrowing cheaper for individuals and corporations, and thus kick-start the economy, which many fear is spiraling into a recession.

Here's how some experts see the effect of the Fed's action:

Q. Will adjustable-rate mortgages become more affordable?

A. The rate cut is good news for consumers with so-called ARMs scheduled to reset soon. ARMs, which typically adjust to market rates every six to 12 months after an introductory term, are often pegged to short-term rates such as one-year Treasury bills or the London interbank offered rate, a global benchmark set in Britain. Those short-term rates track the Fed's key interest rate and already have fallen over the past month in anticipation of a rate cut.

Q. Is this a good time to refinance a home loan?

A: Experts say it is, especially for borrowers with ARMs and good credit who don't plan to move anytime soon. Even before Tuesday's Fed action, rates on 30-year mortgages had fallen to the lowest level since the summer of 2005. There's no guarantee, though, that mortgage rates will keep falling as the Fed cuts short-term rates. That's because long-term interest rates, which influence 30-year mortgages, don't always move in sync with the Fed's actions. They could even rise if the Fed is successful in stabilizing the economy and inflation fears accelerate.

Q. Will the rate cut help borrowers on the verge of foreclosure?

A: No. The Fed's rate cut won't be of much assistance to borrowers with shaky, or subprime, credit, who want to escape their high interest rate home loans. Lenders have become wary of those borrowers after defaults and foreclosures soared last year.

Q. How will the cut help our savings or money market accounts? What about certificates of deposit?

A: Short-term CDs that mature will find lower interest rates. Savings accounts and MMA will see lower interest very soon.

Q. How will the Fed action affect the interest rate on credit cards, home-equity loans and car loans?

A: Banks quickly cut their prime rate -- the rate they charge their best customers -- to 6.5 percent. The prime rate also serves as a benchmark for credit cards and home equity loans, and those borrowers will benefit from lower rates. Borrowers with car loans, however, won't be helped much because those loans typically have four- or five-year terms, and borrowers pay a larger share of principal -- and a smaller share of interest -- every month. So a change in the interest rate doesn't make too much difference.

Q. What will lower interest rates do for the cost of gasoline and food?

A: If a recession is under way, the assumption is that worldwide demand for oil and other commodities will fall, driving down prices at gas stations and supermarkets. But if the Federal Reserve, the White House and Congress are successful in correcting the economy, inflation for those consumer goods could pick up.

Q. Could this spill over into the work force?

A: Indirectly, yes. This could lead to more layoffs, lower or fewer raises, and fewer job openings. It also could take job seekers longer to find work.

Sources: Association Press; Robert Korajczyk, finance professor at Northwestern University.