Rising interest rates have a broad effect on this nation of debtors


May 02, 1994|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

NEW YORK -- Attention all debtors: If you're not already paying more for your loans, you will be soon. The Federal Reserve has boosted short-term interest rates three times since Feb. 4. They're now at 3.75 percent, up from 3 percent when the rise began. Fed watchers think they'll edge up more, to somewhere over 4 percent. The Fed's objective: to keep the economy growing at a moderate pace, without encouraging inflation.

At first, these rate increases dumped stock and bond prices indiscriminately. The second-wave reaction, however, rallied bonds and repaired some of the damage done to bond mutual funds. These investments will do better if inflation is less of a threat.

But investments are only part of the story. Most of America is in debt, and when interest rates rise, the cost of carrying debt goes up, too. Here's how the Fed's recent moves will impact your pocketbook:

* Mortgages. If you refinanced your mortgage at a fixed low rate, you're protected from the rise. Last October, 30-year loans went for around 7 percent. Now they're at 8.8 percent with no points up front (a point is 1 percent of the loan) and 8.4 percent if you can afford to pay two points. A 15-year loan with no points now costs 8.3 percent.

Those prices make adjustable-rate mortgages (ARMs) look pretty good. The first-year rate on a no-point ARM is now running at 5.5 percent, according to HSH Associates in Butler, N.J., and 4.8 percent if you pay two points.

Wait a while before refinancing to a fixed-rate loan. Once the Fed does indeed persuade investors that inflation won't explode, fixed-rate loans should decline again -- maybe to less than 8 percent.

* Home-equity loans. Homeowners have stepped up borrowing against their home equity, to buy a new car, pay off credit-card debt or finance other consumer spending. Most closed-end loans lock in your interest rate. But open-end loans -- accounting for more than $72.7 billion today -- are typically pegged at 1.6 points above the prime lending rate.

tTC Some loans are cheaper in cities where competition is hot. But the typical loan is now up to 8.4 percent. On a $30,000 loan, where you're paying only interest and no principal, that's an extra $150 a year. The interest is tax-deductible on loans up to $100,000, however, so home-equity borrowing is cheaper than it looks.

* Auto loans and leases. In many cities, competition is still keeping auto-loan rates low, says Robert Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla. Average loan rates at banks are only 7.9 percent and at credit unions, still 6.6 percent.

The rates used to figure car-leasing payments can be even cheaper, because of the subsidies currently offered by many auto manufacturers. On two-year leases, the effective loan rate may be as low as 5 percent, says Randall McCathren of Bank Lease Consultants in Nashville, Tenn.

But these bargain rates aren't going to last. Nick Sharkey, speaking for Ford Motor Credit, says that interest charges for loans and leases will probably rise in the next two to three weeks. Moral: Do your shopping now.

* Credit cards. If you're paying 16 percent on your unpaid balances, you probably have a variable-rate card. Typically, it's pegged to the prime, so your cost might go up 0.5 percent. But most cards adjust quarterly, so you won't start seeing the higher charges until summer, says Robert McKinley of RAM Research in Frederick, Md.

In the most competitive markets, credit-card issuers might not increase their rates at all. But that will be the exception, not the rule, says James Daly, editor of Credit Card News. Normally, these rate increases don't amount to much. An extra half point on a $2,000 revolving balance comes to a mere $10 a year.

Nevertheless, rising interest rates should cause you to check the true size of your debt. Monthly debt payments have declined as a percentage of disposable income, thanks in good part to mortgage refinancing. But the total size of America's consumer and installment debt is higher than ever -- confounding the experts who said that the aging boomer generation was finally going to quit spending and start to save.

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