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You Have Two Minutes to Refinance

I was deep into some hard-nosed research and reporting yesterday (ahem) when a flurry of activity broke my concentration. At exactly 2:13, my colleagues in the editorial department at The Motley Fool started wondering aloud if the Federal Reserve had made its pronouncement. (On second thought, copy editors, please make that Pronouncement, with a capital P.)

Like clockwork, at 2:15 the Federal Open Market Committee (FOMC) announced that it raised its overnight interest rate target to 1.25% from 1%, thus ending a 46-year record low.

Surprised? Probably not. This first rate hike in four years caught exactly no one off guard. Even on Tuesday evening, newscasters -- who usually zone out during the nightly business report -- breathlessly told viewers that Alan Greenspan was going to say something important the next day. The central bank has been "leaking" the anticipated rate increase for months and promising more where that came from. If you haven't already heard, this is just the first in small rate hikes that will take place over the next 18 months.

Still, Greenspanticipation has reached an all-time frenzy when my fellow Fools are on pins and needles. As the hubbub around the office heightened, I announced: "Mortgage shoppers: You have two minutes to lock in your loan."

Evidently, my snide aside wasn't such a stretch: Home sales surged in May as buyers scrambled to lock in a decent rate.

It's fine for us money geeks to use the FOMC announcement as an excuse to kibitz around the water cooler. But if you want to take the high road, here's how to make sure that interest rates don't matter much to you:

1. Pay off your credit card debt. Variable interest rates -- like the ones on most of our credit cards -- are tied directly to the Fed's movements. So if you carry a balance, be prepared to pony up more and more in interest in the coming year. The New York Times calculated that this puny quarter-of-a-percent rate hike could add as much as $4.5 billion to the tab of households that carry a revolving balance. Pay it off and keep it off. (If you know someone who needs a nudge, send him or her to this Get Out of Debt area.)

2. Don't time the housing market. Here are the reasons not to buy a home: For a tax write-off; because you think that interest rates are on the way up. A home is where you lovingly hang great-granny's picture and record your kids' growth spurts on the kitchen doorjamb. Yes, houses historically appreciate in value. Someday yours might even provide a handsome windfall for you or your kin. But it's not an investment. Unless you own a home that you rent out for extra income, you shouldn't consider yourself a home investor. Buy when you're ready -- and when you can afford it. Don't buy (or sell) just because the guy in the next cubicle says the market's hot.

3. Don't use your home equity to pay off unsecured debt. Using your home as a piggy bank isn't always a bad idea. Home equity lines of credit have enabled millions of homeowners to improve their abode, send their kids to a better college, and cover medical bills that would have ruined the family's finances otherwise. Last year Americans had $375 billion in outstanding balances against their homes. Still, according to a recent LendingTree study, one-third of homeowners who borrow against the equity in their home use the money to consolidate debt. This is what is called "trading unsecured debt for secured debt." And it can end tragically if you lose your job or have any costly emergency. When you can't pay the bill on your home loan, you could literally lose the roof.

The era of low, low interest rates has taken Americans for quite a ride. Because of it, many families have been able to buy homes of their own -- realizing a once out-of-reach American dream. At the same time, rock-bottom annual percentage rates have lured the average American into deeper and deeper credit card debt.

It could be another 50 years before interest rates return to last year's levels. So at Fool HQ, we say: Bye-bye la-la land. Welcome to rate reality.

Dayana Yochim used to kick herself for not buying a home. But now she's achieved Zen-like oneness with her decision. The Motley Fool is homeowners and renters writing for other homeowners and renters.


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