Borrowers get small break from Fed

NEW YORK (Money) -- After the Federal Reserve's half-point cut in interest rates Tuesday, homeowners may experience some welcome - if small - relief.

Borrowers with home equity lines of credit (HELOCs) will notice savings immediately, says Keith Gumbinger, vice president of HSH Associates.

A HELOC works like a credit card - the homeowner can borrow up to a certain amount during a defined number of years. The loan is secured against equity in the home, and the homeowner pays back only what he borrowed, plus interest.

Such variable-rate loans are typically calculated by adding a margin to the prime interest rate, which is the best lending rate available. "There is a lock-step relationship between what the Fed does and the prime rate," explains Gumbinger.

A half percentage point drop in the federal funds rate will likely result in a similar decline in the prime rate, which stood at 8.25 percent before the Fed announcement Tuesday. Leading banks quickly lowered their prime lending rates to 7.75 percent.

But don't expect a huge windfall, said Greg McBride, senior financial analyst at Bankrate.com. "If you have a $30,000 home equity line, a half point rate cut by the Fed saves you $12.50 a month," he said. (At 8.25 percent, your minimum payment would have been $206.25 a month on $30,000 loan; at 7.75 percent, it's $193.75.)

(Credit card holders will probably see their rates drop, as well.)

Home equity loans, which unlike HELOCs are closed-end loans with fixed terms, will probably also see some downward pressure. "But there is no immediate decrease," said Gumbinger.

The real impact of a half-point drop for households is in mortgage products. "That's true for both fixed-rate mortgages and for adjustable rate loans," said McBride. Some ARM rates are tied to one-year Treasury yields and homeowners with loans resetting higher this fall could be facing rates of 6.75 percent, rather than 7.5 percent.

"On a $250,000 mortgage, that's a difference of more than $120 a month," said McBride.