Rising rates donít have to cost you
By Greg Wiles
Q. Interest rates have been rising. Is there anything I should be doing because of this?
A. Changes in interest rates should be monitored to see how they might affect your finances. Hawai'i financial planners suggest people start by scrutinizing three areas ó investments, mortgages and credit cards ó to see if higher rates are changing their returns or payments.
Interest rates have been rising as the Federal Reserve tries to curb inflation. The central bank's benchmark overnight bank lending rate now stands at 3.75 percent after 11 consecutive rate hikes.
More rate increases may be on the way. Merrill Lynch & Co. economist David Rosenberg expects the rate will peak at 4.5 percent next year.
The rise has prompted Honolulu financial planner Les Andrews to advise clients to shift some of their money out of intermediate and long-term mutual bond funds into cash.
"When interest rates go up, bond prices go down," said Andrews. "They might be better off in a money market fund."
Since April, Andrews has advised clients to lighten their holdings in intermediate and other bond funds and put the money into cash.
Lesley Brey, an O'ahu-based financial planner, said investors need to consider their goals before moving into other investments. She said someone who bought a bond four years ago to finance a child's upcoming college education may want to keep the investment.
Other people who have bond mutual funds may see the value of the holding decline. She said she doesn't recommend people invest in long-term bonds because they tend to be as volatile as stocks without a similar return.
Rising interest rates can translate into higher payments on variable-rate loans. People with adjustable mortgages should consider locking in the loan at a fixed rate.
Fixed-rate mortgage interest rates are lower now than when the Federal Reserve began raising the overnight bank rate in June 2004, said Greg McBride, senior analyst for North Palm Beach, Florida-based Bankrate.com. At the same time, adjustable mortgage rates are poised to increase, he said.
That's because fixed mortgage interest rates aren't pegged to short-term markets affected by increases in the Federal Reserve's overnight lending rate, while adjustable mortgages are, McBride said.
"Now is a great time to switch," McBride said. A homeowner with a $400,000 mortgage at 4.4 percent interest rate could see it jump to 6.4 percent when the lender adjusts rates. That translates into mortgage payments rising from $2,000 a month to $2,500, McBride said.
Monthly payments for a 30-year fixed-rate loan at 6.1 percent would be $2,424, he said. The borrower also would have to pay loan-processing and other fees.
"It would save you $100 a month, and it protects you against further increases," McBride said.
Andrews said switching to a fixed-rate loan doesn't make sense if the borrower plans to sell within a year or two, because of the financing fees. Otherwise, he favors fixed over variable-rate mortgages. "We would take a look and lock in payments while you can still qualify," he said.
Brey recommended adjustable mortgage holders analyze what might happen with interest rates in two to three years. If they can't afford fixed or adjustable loans under those scenarios, they might consider selling now while real-estate prices are high, she said.
McBride said people should pay down credit-card balances to keep from incurring more interest costs as rates rise. Consumers with fixed-rate cards also should be aware that fixed-rate issuers can change rates with as little as 15 days of notice to card holders.
Bloomberg News Service contributed to this report.