Do Lower Interest Rates Affect Homeowners Who Are Already in Difficult Financial Situations?

Interest rates are the rates charged by lenders to people who take out loans, such as mortgages. While the rates offered to individual borrowers will be largely determined by the person's personal credit rating -- the riskier the borrower, the higher the interest rate -- they are also affected by large-scale movements in the price of loans offered by many lenders. Lower interest rates can aid homeowners in financial trouble in a number of ways.

Lower Interest Rates

When interest rates drop, anyone who wishes to borrow money likely will be required to pay less to secure the loan than he would have paid otherwise. For a person who is required to pay off a debt, this can offer some debt relief, as the person may be able to take out stabilizing loans. However, a homeowner whose interest rate on his current mortgage is fixed will not have lower monthly payments.

Adjustable-Rate Mortgages

By contrast, a person with an adjustable-rate mortgage likely will have the size of his payments reduced if interest rates are lowered. This is because the interest rate on this type of mortgage depends on the going rate of interest in the wider lending market, as measured by various indexes. The index to which the mortgage is linked should reflect the decline in interest rates, thus causing the amount of the person's payments to drop.

Other Types of Loans

In addition, a person may wish to take out another type of loan or line of credit to help extricate himself from a difficult financial decision. For example, a person who has paid off part of his home may choose to take out a home equity line of credit, which he can use like a credit card to take out loans. As the interest rate declines, the rate attached to this line will decline, too.

Refinancing

Another way in which a homeowner who is in financial trouble can be helped by a decline in interest rates is through refinancing. If a person is having difficulty paying off his current mortgage, he may be able to refinance to a cheaper mortgage. This is usually easier to do if the interest rate has declined since the time he took out his existing mortgage.