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Interest rates are changing. Should your plans?

  Fed Alert

Here's a look at how the Fed's quarter-point rate increase should or should not affect your plans to borrow or invest:

Should I change my plans to ...
Buy a house?
Borrow from my home's equity?
Take out an auto loan?
Borrow on a credit card?
Invest in CDs?

Should I change my plans to buy a house?
Your house is your shelter, and you need shelter no matter what happens to mortgage rates. Don't shelve your plan to buy a house just because short-term interest rates are rising. On the other hand, beware a high loan-to-value mortgage -- a home loan in which you borrow 90 percent or more of the purchase price.

In places where home values have been appreciating especially steeply, rising interest rates could make home prices plateau or even fall in the coming months and years. If prices fall enough, people with high loan-to-value mortgages could find that they owe more than their houses are worth. That's OK if they plan to live in their homes for a long time, because prices eventually will recover. But woe to homeowners who are forced by circumstances to buy high and sell low.

Should I change my plans to borrow from my home's equity?
Rates on home equity loans and equity lines of credit will still be low by historical standards. If you have a good reason to tap your home's equity and can comfortably repay the loan, then do so. Bankrate.com features an article explaining the differences between home equity loans and lines of credit. Home equity loans have fixed rates, and averaged 6.87 percent Sept. 15, a little lower than they were at the time of the Fed's Aug. 10 rate increase. Rates on home equity lines of credit were 4.81 percent Sept. 15, slightly higher than six weeks before.

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Should I change my plans to take out an auto loan?
No. Dealers are offering hefty rebates so they can clear their lots. Negotiate the best deal you can for a vehicle and see what kind of financing the dealership is offering. Although the interest rates on vehicle loans will edge upward, if this is the right time for you to buy a car, go ahead. Also check local credit unions; they routinely beat banks when it comes to offering low-rate car loans. Many credit unions base their membership on geographic boundaries, so it's easy to find one that you can join.

Should I change my plans to borrow on a credit card?
Depends on how much debt you have and whether you're having trouble paying it off. We're in the beginning of a period of rising interest rates that could last for a few years, maybe longer. Credit card debt will pile up fast. If you are paying considerably more than the minimum due each month then probably you don't need to worry about paying a few basis points' additional interest. But if you're making minimum payments or just slightly above the minimum, you should be concerned about your debt load. Check here for the best credit card deals nationwide.

Should I change my plans to invest in CDs?
No. Go ahead and buy CDs but keep the maturities short, one year or less. Shop around for the best rates. You can save a lot of time and rake in a lot more interest by visiting Bankrate.com's Highest Yields page. There are at least 20 financial institutions offering from 2 percent to 2.57 percent this week on six-month CDs versus the national average of 1.26 percent that you'd likely find at your corner bank.

If liquidity is super important to you, check our listing of the highest money market rates where you'll find more than a dozen institutions are offering from 2 percent to 2.20 percent.



-- Posted: Sept. 21, 2004
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30 yr fixed mtg 3.65%
48 month new car loan 3.21%
1 yr CD 0.54%

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