As the year comes to an end, the week prior to December 31 inspires reflection on the previous year's economic news. Many wonder if interest rate cuts are on the horizon for the New Year. Most homeowners agree that they'd be a welcome gift from the Federal Reserve.

Entering 2008, the direction of interest rates remains unpredictable. Nobody has a crystal ball to tell which direction rates are headed. We can, however, determine whether or not such changes in interest rates are going to help the wallet of the average American homeowner.

Rate cuts and the Fed

Borrowers holding loans that are tied to the U.S. prime rate-including everything from credit card interest rates to home equity loans and adjustable-rate mortgages-will see a positive impact on their finances if the Federal Reserve ("the Fed") lowers rates. The Fed has not been shy about cutting rates when it seemed urgent to do so. When banks and other lenders felt a credit crunch following the first wave of bad news from the subprime lending sector, for example, it was quick to respond with lower rates. By cutting them, the Fed freed up urgently needed cash, because when rates fall, it's cheaper to borrow money, even for banks.

Mortgages rates and foreign factors

Rate cuts in the U.S., however, are not necessarily good news for all homeowners. Many adjustable-rate mortgages, for instance, are not calculated on domestic rates, but on international rates, such as the London Interbank Offered Rate (LIBOR), which rises and falls according to rates in London, England. The LIBOR has been steadily rising since 2001, and many economists expect that interest rates in Britain will continue their climb into 2008.

To figure out which kind of mortgage you have-and what rate it's pegged to-check the fine print of your mortgage documents, or simply ask your lender.

Mortgage rates bring glad tidings

For those who are saving rather than borrowing, a rate increase would bring glad tidings. Returns on money market accounts, certificates of deposit, and other savings instruments climb when rates do, but this is going to be of little consequence for most consumers in the U.S. The typical American hasn't saved a dime in years, based on statistical data. The savings rate-an index that calculates how much the average American household saves after all the bills are paid-dipped into negative territory in recent months, for the first time since the Great Depression, and it has hovered near the break-even point for more than a year. In other words, most Americans are borrowing and spending more than they're saving, and have been doing so long enough for it to be considered habitual, not incidental or cyclical.

The bottom line is that if you want to benefit from interest rates, regardless of which way they move in 2008, make a New Year's resolution to save more, borrow only as needed, and spend wisely.