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Prepare for rising interest rates

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NEW YORK (4/19/10)--What goes down, must come up? It would seem so with interest rates. Economists, researchers, U.S. Treasury professionals all agree. In the words of David Wyss, chief economist with Standard & Poor’s, “We’ve had almost a 30-year rally that’s come to an end” (The New York Times April 10). After a three-decade decline in the cost of borrowing, consumers are facing the beginning of what is expected to be a sustained period of rising rates. Let's look at three areas where interest rates are likely to increase. Housing--Rates are already on the move upward. The 30-year fixed-rate mortgage has risen half a percentage point since December. Consider as a further sign that mortgage rates will continue to rise: the Federal Reserve has halted its emergency program to buy mortgage debt. Homeowners, if you haven’t refinanced in the past two years, your optimal window is closing. This spring could offer house hunters the best housing choices and rates. Predictions put the 30-year mortgage close to 6% by year end; it is about 5.3% now. According to Christopher J. Mayer, a professor of finance and economics at Columbia Business School, each increase of one percentage point in rate adds as much as 19% to the total cost of a home. Credit cards--The typical American household now pays about $200 more a year in additional interest rates over fourth quarter 2008, when rates were at their lowest. Add in new federal regulations, and you get a new landscape for the credit card arena. Gone are low, low teaser rates; in are late-payment rates--some nearing 30%--that penalize you for 12 months. Compare the most recent statements for all your credit cards, and call for current terms on those cards you don’t use. If you’re not carrying a credit union-issued card, you’re probably paying too much in interest. To protect yourself against late-payment fees and their companion penalty interest rates, set up automatic direct payments. If you’re uncomfortable automatically paying the entire monthly bill, try $50 or $100 in an automatic payment and the rest in an additional online payment. Investing--Consumers aren’t the only ones facing a rate hike. The U.S. government, too, expects to pay more to borrow. This could result in more Treasury bonds issued. Investors in American bonds and bond mutual funds might consider reallocating assets. Bill Goss’s Pimco Total Return fund has reduced its U.S. debt holdings to 30% in favor of debt from Europe and developing countries. For another investing idea, watch the “Investing: Dollar-Cost Averaging” video in Home & Family Finance Resource Center.