When rates rise, some people win

America is entering that edgy season where financial markets and economists are trying to figure out when interest rates will go up.

June? After the November election? It's a huge guessing game that's especially intense now because interest rates have been at historic lows and are already rising a bit.

But step off that speculation merry-go-round, and the big question isn't when, but who wins and loses from higher rates. Perhaps some people can shift their resources to minimize the effect of being in the wrong category.

Already, signs of a bustling economy and the assumption that the Federal Reserve, as a result, will sometime later this year boost interest rates have prompted financial markets to raise rates in advance.

The yield on a 10-year Treasury bond is up about half a percentage point in the past month to approximately 4.4 percent. It was 3.1 percent last June.

The Mortgage Bankers Association reports that in just the week ending April 16, the average contract interest rate for 30-year fixed-rate mortgages increased to 5.84 percent from 5.77 percent a week earlier; a one-year adjustable rate mortgage (ARM) rose to 3.58 percent from 3.53 percent.

What these changes suggest is that the risks of owing money are going up. In general, higher interest rates favor the people who have money to loan - creditors - at least eventually. Contrariwise, they can batter debtors - often the "common man" - with rising interest costs.

One obvious loser is the new homeowner. She or he will have to pay more on a mortgage. Some would-be buyers will be shut out of the housing market altogether.

Homeowners with ARMs would also see their monthly bills rise eventually, depending on their contract. Mortgage refinancing activity has declined by half from a year ago. The costs of refinancing exceed potential savings for more homeowners.

The slowdown in refinancing could also hurt affiliated industries, such as home repair, in coming months.

There are other winners and losers. Buyers of a new car or a major appliance can expect to find fewer financing options with bargain interest rates. People with credit-card debt could also lose out. Although interest rates on credit cards are usually slow to adjust, they will move up if the prime rate of commercial banks rises.

Businesses also will have to pay more on loans. So will the federal and other governments as they refinance debt.

But higher rates boosts the fortunes of some.

People heavily invested in bonds could see the paper value of the portfolio go down as interest rates rise, but not the return. As portfolios turn over, they could get a higher yield. Bank certificates of deposit will pay more when renewed.

Page: 1 | 2