Interest rate cut could help ARM holders

— -- The Federal Reserve's action on Wednesday was the latest in an interest-rate-cutting drive over eight months that's helped lower the yields that many adjustable-rate mortgages are tied to.

Thanks to the Fed's cuts, the rates to which those ARMs have been resetting have sometimes saved homeowners hundreds of dollars a month. For some struggling mortgage holders, the lower rates have helped stave off delinquencies or foreclosures.

"This could be the difference between a person being current (on a mortgage) or delinquent," says Orawin Velz, senior research director at the Mortgage Bankers Association. "The risk of foreclosures due to resets has declined."

But Wednesday's cut might not bring any further relief for ARM holders, says Greg McBride, a senior analyst at Bankrate.com. The benchmark indexes for ARMs had already factored in Wednesday's Fed rate cut, he says. ARM holders, McBride says, "got the benefit back in March."

Still, the Fed's action, its seventh cut since September, could bring other benefits. The average rate on a home-equity line of credit fell to 5.7% last week from 7.3% in January, Bankrate.com says; the average on a home-equity loan was 7.73%. Those rates move in direct response to Fed cuts, so they could fall further this week, McBride says.

Other effects on consumers:

•Possible relief ahead for savers. As is usually true when the Fed cuts, savers with certificates of deposit will see lower rates, though their discomfort could end soon if the Fed halts its rate cutting. "We are at or near the bottom on CD yields," McBride says. "If the Fed moves to the sidelines, that will be the first good news savers have had in a long time."

Last week, the average one-year CD rate was 1.93%, Bankrate.com says. But to try to draw more deposits, some financial institutions are dangling much higher rates, McBride says, so savers should shop around.

•Some credit card holders win. Consumers with variable-rate credit cards could benefit, because those rates also tend to move in lockstep with the Fed, McBride says. But the lower rates will be restricted to those with top-notch credit. Saddled with losses from other consumer loans, banks have sharply raised rates for customers considered risky, even if they've paid their bills on time and have decent credit.