A lot of people are wondering what this means to the folks like you and me. Let me explain.
When you take out a loan, a number of factors are included that determine the interest that you pay. One of them is the Federal Reserve interest rate. Banks then tack on their own additions, and then that's the final percentage that you pay. Now, this 3/4% cut will help out in a significant way.
Many talk about the "sub prime mortgage" problems that are going on right now. Now, me personally, I took out a mortgage on my home at a 30 year fixed rate. That means no matter how high or low the interest rates go, my payment is always the same. It's a good idea for many reasons, one of which is that it's my largest monthly expenditure and I know how much it's going to be from now until it's paid off.
However, some people took out more exotic loans like 5 year ARM, second mortgages, and even interest only loans before they even moved into their new home. These loans had variable interest rates and when the rates went up, their payment skyrocketed. For example, the interest rate on my home is around 4% give or take a quarter point, I don't have the exact one in front of me. Now, my mortgage payment is around $1,700 a month, including taxes, insurance, etc. At that time I bought the home, the Federal Reserve interest rate was at 1.5%. It was as high as 5.25% as recently at June 29th, 2006. That additional 3.75% tacked onto my monthly mortgage payment would have made it $2,517 a month. There is simply no way that would have worked for me and it would have crippled me financially.
That's the kind of thing that people were doing left and right. There were financial "advisors" on CNN saying that if you had equity in your home that wasn't being used for investments or something along those lines, you were an idiot. Well people did that, riding the home market bubble. Then the markets crashed, and interest rates rose, a double whammy. That meant that not only did people have a huge mortgage that they could no longer afford, now they had investments that lost them money or were worthless.
What it boils down to is this: If you can't afford a home on a 30 year fixed mortgage, you can't afford the home.
If you need an exotic loan to get the home you want, you're over extending yourself.
What's worse is that people don't understand that over time, your fiscal health will get better. Promotions, new jobs, raises, etc, will all make you make more money. That means that your mortgage that you were barely making early on in life is now nothing towards the end of the loan. Perfect example: My wife's uncle is a farmer in Eastern Washington. He bought his home and a ton of land in the 1970's. He was struggling financially then. Now he's doing just fine. Something catastrophic happens? Big deal, you know how much his mortgage payment is? $240 a month. I spend that in lunches during the work week throughout the month.
Patience is a virtue, and it's no better shown then in the life of your home.
Treat your home like your home. Don't treat it like a status symbol. Don't treat it like "See what I can afford!". Treat it like a place where you're going to raise your kids, love your wife, live comfortably. Yes, we all want to live in a nice, 5 bedroom monster house with a Jacuzzi in the master bedroom and a theater room, and a 4 car garage. I know I do, but I know that sooner or later, I'll have that and more. It just takes patience.
That being said, we all need to be a little more fiscally responsible, myself included. I am currently working to pay off credit card 
debt for my wife's incoming student loan payments. I've already paid off both cars and have gotten my credit cards down pretty good, but I'm not out of the woods yet. We all need to be a lot more fiscally responsible across the board. That means that Universal health care will have to take a backseat. SCHIP programs won't get the 40% increase that Democrats want to have. The war in Iraq will have to be wrapped up soon, although the risks of that are very great, so great care must be taken in that area.
Stocks have gotten a mixed bag as well.
However, there's something that you need to see.
We are at a golden opportunity that I don't think a lot of people realize.
We have the opportunity to not only get out of this financial mess, but to make ourselves better off because of it. If we cut the fat from the Federal budget, we have the ability to not only pay off our national debt, but to become profitable. It just takes the collective will of the American people and it's representatives in Congress and the President to do what's right. I know that's a lot of optimism to be having, but I've seen this country do great things in the past when we get together.
I've seen the American Red Cross blood bank lines wrapped around the building multiple times after 9/11.
I've seen ordinary American citizens roll up their sleeves and open their wallets after Hurricane Katrina.
I've seen America defeat some of the worst dictators in history.
I've seen America send in the Marines into countries ravaged by genocide and famine to help out.
I've seen America send humanitarian aid to Iran after they had an earthquake that killed 90,000 people.
I've seen America send humanitarian aid to Pakistan after their earthquake that killed 70,000 people.
We can do better, we must do better, it's simply who we are as a people.
Travis
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