Little relief for borrowers

You've heard that interest rates have fallen.

Now you're hoping to save big bucks on your mortgage, credit cards or car and students loans.

Well, you might see some savings.

Just don't expect a windfall.

Yes, the Federal Reserve Board, the nation's central bank, has cut rates, including another reduction last week.

Even so, borrowers generally "haven't seen a lot of relief," so far, said Scott Anderson, senior economist with Wells Fargo in Minneapolis.

Many rates - especially long-term rates - haven't dropped all that much, in large part because of rising inflation, he said.

For example, the average 30-year fixed rate mortgage nationwide carries an interest rate of 5.62, down from 5.74 percent three months ago, according to the Bloomberg financial news service.

In contrast, the widely watched Fed funds rate has dropped 3 percentage points since last year.

Why the big difference in the size of the declines?

A little background:

The Fed, the nation's central bank, is trying to stimulate the economy by cutting the Fed funds rate, or the interest rate that banks charge each other for overnight loans.

The Fed funds rate, which stood at 5.25 percent last year, now is down to 2.25 percent.

That affects the interest rate that consumers pay on credit cards and auto loans, among other things.

But the Fed funds rate isn't the only reference that banks use to adjust their interest rates.

One of the most popular benchmarks for U.S. financial institutions is the London Interbank Offered Rate, or the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

LIBOR, as it's commonly called, has fallen from 4.63 percent late last year to 2.6 percent last week - a much smaller decline than the drop in the Fed funds rate.

In trying to make sense of interest rates, don't underestimate the importance of inflation.

The federal government's Consumer Price Index, the most widely used measure of inflation, rose 4.1 percent in 2007, up from

2.5 percent in 2006. The 2007 increase was the biggest since 1990.

Consumer prices in February 2008 were 4 percent higher than a year earlier.

When inflation rises, the buying power of the dollar erodes. To compensate for the loss, lenders want a higher interest rate.

And the longer the life of the loan, the greater the danger from inflation - and the greater the compensation that lenders want.

Think of it this way:

On one side is the Federal Reserve Board. It's trying to push down interest rates by lowering the Fed funds rate.

On the other side is inflation. It worries lenders and puts upward pressure on interest rates, especially on longer-term rates.

Another factor is the sub-prime lending mess, which has caused investors who buy mortgages to be more cautious.

The result is that mortgage rates have fallen, but not dramatically.

It's unclear whether the Fed will continue to cut rates.

Anderson said he thinks the "Fed is still open to further rate cuts if the economic and credit outlook continues to deteriorate. But we are much closer to an end point on Fed easing than we were at the start of the year."

Officials with the Federal Reserve Bank of Minneapolis - whose territory includes Minnesota and North Dakota - declined comment.

In any case, many borrowers already are affected.

Mortgage questions?

Some prospective homebuyers are wondering whether they should buy now or wait in hopes that rates fall further.

Even smart, knowledgeable people can only guess at the direction of interest rates.

Rates might go down. They might go up. They might stay the same.

One thing is certain.

By historical standards, "These are very good rates," said Ron Jordan of State Bank of Fargo.

Best advice from bankers:

If you can swing a mortgage now, don't wait.

There's also the question of whether this is the right time to refinance your mortgage.

One rule of thumb is that rates need to fall by about 1½ percentage points to justify refinancing.

Another rule of thumb is that refinancing makes economic sense if you plan to stay in the home and can recover the cost of refinancing within 12 to 36 months.

If you took out a loan in the past few years - when rates have been relatively low - the recent decline might not be sufficient.

For instance, the average

30-year fixed rate mortgage nationally a year ago was

5.68 percent, compared with 5.62 percent now, according

to Bloomberg.

Still, consider visiting your lender anyway. Doing paperwork in advance could help you take advantage quickly if rates do drop sharply.

Jeff Thomas, community banking president of Wells Fargo in Fargo, suggested that consumers visit their banker to see whether they'd save money by combining assorted debts into one loan at a lower interest rate.

Car rates shift down

The average rate nationally for a five-year new car loan is 6.8 percent, down from

7.1 percent early this year, according to Bankrate.com, the North Palm Beach, Fla.-based company that collects financial information.

The savings from that drop aren't exactly huge.

At 6.8 percent, the monthly payment on a $15,000 five-year car loan is $295.60.

At 7.1 percent, the monthly payment is $297.73.

Credit card rates fall

About 70 percent of credit cards have variable interest rates that rise or fall in step with Fed interest rates, according to IndexCreditCards.com, an Internet site that tracks credit cards.

The average rate for non-reward customer credit cards is 13.3 percent, the site's Credit Card Monitor survey says.

That number doesn't yet reflect the Fed funds rate reduction earlier this week.

The average rate for non-reward consumer credit cards early this year was 14 percent, according to the survey.

Setting student loans

The interest rate on the widely used federal Stafford student loan is set at

6.8 percent.

That's not going to change because of the reduction in the Fed funds rate.

But lenders do offer so-called alternative student loans, rates on which are dropping.

At the Bank of North Dakota, a major regional player in the student loan industry, the variable rate on alternative loans - which is reset every 90 days - currently stands at 6.34 percent.

As things stand now, that rate will be reset to 4.1 percent at the end of the month, although the number could rise or fall by then, said Eric Hardmeyer, bank president.

An alternative loan with a 10-year fixed rate at the Bank of North Dakota currently carries a 7.08 interest rate.

That rate will be reset to 6.75 percent at month's end, although that number also could rise or fall, Hardmeyer said.

Savers: The flip side

Sure, lower rates can be good for borrowers.

Savers are another matter.

Just one example.

The average yield nationally on a 12-month certificate of deposit is 2.96 percent, down from 3.48 late last year, according to Bankrate.

On a $10,000 CD, that's about $50 less in interest.