NEW YORK (TheStreet) -- It may not happen today when the Federal Reserve's Open Market Committee announces its decision about whether it will raise interest rates, but the first uptick in rates in nine years is coming -- soon. What should you do about it?
The answers: Look first at your mortgage. If you don't have a fixed rate, get one, said Greg McBride, Washington bureau chief of Bankrate.com. A financial clean-up to lock in low rates on other debt is also a smart idea, he said.
"Rates are only going to go in one direction," McBride said, and that's up, which will affect every interest rate you pay. "You could be looking at $100 a month between a mortgage, credit cards, home-equity line of credit, and a car loan if you buy a new one."
The math is pretty easy.
If you are risk averse, get out of your adjustable-rate mortgage, which is likely to react quickly when the Fed acts. The interest rates on ARMs are tied to either short-term Treasuries such as the one-year note, or to the London Interbank Offered Rate (LIBOR), a rate at which banks lend money to each other.
One-year Treasury yields have almost tripled since last June, but are still only about 0.25% per year. That will mean a borrower with a Treasury + 2.75% adjustable rate will see his payment climb to 3% from 2.875% (Disclosure: I have such a mortgage). That works out to roughly $3 a month more per $100,000 of loan balance on a 30-year loan. Less than 10% of U.S. mortgages carry adjustable rates, according to the New York Fed.
"It's not one interest-rate hike that breaks the bank" for borrowers, McBride said. "It's the cumulative effect of rate hikes over a couple of years.''
Fixed-rate mortgages have already anticipated at least the Fed's initial moves, with rates for new 30-year loans rising by about a third of a percentage point since January, when weak data and bad weather pushed prospects for a rate hike further into the future. However, mortgage rates are slightly lower than they were at this time last year for fixed loans, which may limit the impact of rising rates on builders like PulteGroup (PHM) and KB Home (KBH). Mortgage lenders such as Bank of America (BAC) and Wells Fargo (WFC) have been waiting for higher rates, hoping to command a wider spread between loan rates and what they pay for deposits, but those gains have proven elusive.
The history of previous tightening cycles by the Fed bears this out. Between 2003 and 2006, one-year ARM rates jumped to 5.8% from 3.5%, according to the St. Louis Federal Reserve Bank.
Still, adjustables may remain a better deal than 30-year fixed rate mortgages for now -- even if they carry more risk of future rate hikes. Rates on five-year ARMs are a full percentage point lower than rates for fixed 30-year loans, according to Freddie Mac.
Credit cards are often tied to the prime rate, which is highly responsive to Fed action, McBride said.
Car loans may be the least affected of the major consumer-credit categories, McBride said. The reason is that competition to lure car buyers is still fierce, even with U.S. auto sales near record highs. Cheap interest rates are among the key incentives automakers like Toyota (TM), Ford (F) and GM (GM) use to grab market share.
"The good news is that competition will keep the lid on even if the Federal Reserve raises rates," McBride said.
To sum up Bankrate's advice: Take on a low-interest credit card to consolidate balances while rates are still near their floor, get a fixed-rate mortgage for the long term, and pay down the balance on any home-equity lines of credit where possible.