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The Fed's Cut Won't Save Struggling Homeowners

If you're in an ARM, you might have already seen whatever benefit you could get.

Lower short-term rates may be just what was needed to restore confidence to financial markets and keep the economy out of a recession, but it won't bring much relief to homeowners who are struggling to make their mortgage payments.

Although stocks rallied sharply after the Fed lowered rates by 50 basis points -- with the Dow Jones Industrial Average rising 2.5%, its biggest percentage gain since 2003 -- it won't help the millions of Americans with adjustable-rate mortgages refinance into a fixed-rate mortgage before their payments jump.

That's because fixed mortgages rates are more closely pegged to 10-year Treasury yields than short-term interest rates. And long-term Treasury yields have already come down over the past few weeks as investors who have been spooked by the mortgage crisis have fled to the relative safety of government bonds, pushing prices higher and yields lower.

Now that the Fed has come to the economy's rescue, Treasuries are likely to lose some allure. That means prices are likely to fall, and rates, which move inversely to prices, to move back up.

"Fixed-rate mortgages have been known to rise, despite Fed cuts, particularly if the inflation environment seems troublesome," says Keith Gumbinger, vice president of HSH Associates, a consumer loan research group.

The benchmark 30-year fixed-rate mortgage fell 22 basis points last week to a four-month low of 6.28%, according to a national survey of large lenders by Bankrate.com.

In other words, if you weren't able to refinance into a fixed-rate loan over the past few weeks, when rates fell in anticipation of the Fed's move, you probably won't be able to now that the central bank has actually cut rates.

The news for homeowners isn't all bad, however. Lowering the fed funds rate to 4.75% will have a direct impact on other kinds of consumer debt that's linked directly to the prime rate, including home equity loans, lines of credit and some credit cards. Banks are likely to cut the prime rate by half a percentage point, to 7.75%, over the next few days.

Gumbinger notes that borrowers who have a "piggyback" mortgage -- essentially a second loan to cover the down payment on a house -- have seen their monthly payments keep rising as the Fed raised short-term interest rates 13 times starting in 2004. He says consumers could see a cut in the rates they pay on home equity loans and lines of credit as soon as next month.

It generally takes at least one billing cycle for banks to make the adjustment. So if your billing cycle closed Monday, you're out of luck. On the other hand, if you're in the market for a brand new line of credit, the Fed's move could be reflected in offered rates as soon as Wednesday.

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The average interest rate on a $30,000 home equity line of credit is currently 7.79%, up slightly from 7.78% last week, according to Bankrate.com.

Homeowners with adjustable-rate mortgages that are about to reset will also get something of a break. "The good news here is that one-year Treasury yields, which are a common index for adjustable-rate loans, have come down notably over the last month," says Greg McBride, senior financial analyst at Bankrate.com. "So that reset, while still a big deal, will be less painful."

Unfortunately, if your mortgage rate has already reset, even a 50-basis point in prevailing rates probably won't mean the difference between staying in your home or losing it.

Most people who have already been hit with a reset have either figured out a way to refinance out of their loan, figured out how to make the higher payments, or have fallen behind on their payments. And if you are already behind on your payments, the rate cut is not going to help, McBride says.

The Fed's move will eventually affect other kinds of consumer debt, too. It generally takes up to three months for interest rates on credit cards to track short-term rates, and it's typically just the borrowers with the best credit who see the most benefit. In other words, the people most in need of a break on what is probably their most expensive debt won't get it.

Auto loans, although fixed-rate, are also generally tied to the prime rates. So the Fed's move is an added bonus if you're in the market for a new car. Automakers, hit by declining sales, are already falling over themselves to offer incentives.

The average interest rate on a 48-month new car loan is 6.92%, unchanged from last week, according to Bankrate.com.

Of course, the flip side of lower short-term interest rates is that consumers will earn less interest on their savings accounts, certificates of deposit and money market accounts. Yields on CDs generally move in line with Treasury securities of similar maturities, since they compete for consumer's dollars. And just like long-term Treasuries, yields on T-bills had already moved lower in advance of the Fed's rate cut on the back of safe-haven buying.

However, competition also plays a big role in savings rates because banks depend on deposits as an inexpensive source of funds. That's particularly true now that the housing crunch has made it harder for banks to fund mortgages and other kinds of loans by selling them to investors. This competition keep CD rates from falling too fast in a declining rate environment.

The average interest rate on a one-year CD is currently 4.79%, down from 4.83% last week, according to Bankrate.com.

Allison Bisbey Colter joined TheStreet.com in 2006 from the New York office of Dow Jones Newswires, where she spent the previous seven years covering consumer finance, mutual funds and hedge funds. Prior to that, she worked in Europe for Dow Jones covering transportation from London and Italian capital markets from Milan. She is a graduate of Wesleyan University, where she received a BA in government.