What to Do As Interest Rates Rise - Page 2 of 4

What to Do As Interest Rates Rise

the course of the seven years,” he explains.

To select the best mortgage, you should have a pretty good idea of how long you plan on being in the home, says Gumbinger. A fixed-rate mortgage remains a very attractive deal and is probably best for anybody who intends to stay put for about seven years.

For others, 30 years of fixed-rate stability may not be worth the price. For those buyers, Gumbinger suggests hybrid adjustable-rate mortgages (ARMs), which feature a fixed interest rate usually for three, five, seven, or 10 years until they turn into traditional adjustable-rate mortgages. In this category, 5/1 ARMs are the most popular; they’re fixed for five years and adjusted annually thereafter. Currently, ARMs are available at an interest rate around one percentage point below the comparable 30-year fixed rate.

If you’re considering refinancing to get cash for home improvements or to switch to a better interest rate, compare your current spending to the cost of getting a new mortgage. If you’ve been in your home for a while or have an extraordinarily low interest rate, it doesn’t make sense to refinance your loan to get cash at the expense of adding years to your mortgage at a higher interest rate.

If you are currently stuck with a sub-prime loan (high-interest loans given to people with poorer credit ratings), you might consider a longer-term fixed-rate mortgage if you qualify. It may buy you some certainty in your monthly budget as interest rates rise.

Maintain a diversified portfolio. The stock market generally responds negatively to rising interest rates, meaning that many issues may lose value. While some investors see this as a great opportunity to go hunting for discounted stocks, this is also a time when investors might do well to pull back their exposure to stocks by about 10% to 20%, says Sanford Coggins, former Merrill Lynch financial adviser and investments vice president .

Coggins advises clients to diversify their equity holdings so that nearly every sector is included. For example, 10% or 15% of equities could be devoted to the utilities and energy sectors, which generally do well in a money-tightening environment. Coggins suggests simultaneously adjusting your portfolio weightings away from sectors that are sensitive to interest rates, such as financial services. “The average investor should probably look at the S&P 500 weighting and then balance off of that,” he says. “Then take [industries] such as energy, healthcare, or utilities and start moving ever so slightly [until about] 15% of the portfolio is invested in those sectors.” According to Coggins, this strategy should help the investor outperform the S&P but not lose his shirt if he’s wrong.

Keep bonds short. Since long-term bonds suffer with rising interest rates, reducing the maturities in a bond portfolio will result in less volatility, explains Coggins. “The average maturity should be somewhere in the three- to five-year range versus the 20- or 30-year bond that you can hold in a portfolio while interest rates drop.”

Harriet Jones, 40, is the CEO of her own real estate