Uh-oh. Rising interest rates are starting to look serious. They're pinching you from two directions.

First, they'll take a nip out of your everyday spending power. Rates will rise on your credit-card debt, home-equity loans and adjustable mortgages.

Adjustable mortgage rates were up to 7.53 percent last week, according to HSH Associates in New Jersey. Fixed rates averaged 8.85 percent.

On the second front, rising rates continue to undermine your stocks and stock-owning mutual funds. You're especially vulnerable if you borrowed money to invest.

In 1998 and 1999, it seemed to make sense to go into debt to purchase stocks. The market rose by enough to give you a profit, after expenses.

A record number of investors borrowed from their brokers (those are called "margin loans"). Others went into the market with money from home-equity loans.

This year, many of those with margin loans are getting killed. The jury is out on whether the home-equity loans will pay.

When home-equity loans were at 8 percent and the stock market rose by more than 20 percent, you were doing fine.

Today, however, the game may have changed. HSH expects home-equity loans to rise to 10.2 percent. That's roughly the long-term average return from stocks.

No one knows how well stocks will do in the future. But at current interest rates, there's a greater risk that your loan strategy will not work out.

One argument in favor of borrowing is that it lets you diversify. Instead of owning just your home, you have a stake in the stock market, too.

But if you have a company 401(k) or 403(b) plan, you already have a stock market stake.

The decision to borrow extra money against your home will then depend on how easily you can handle the monthly payments.

You're in a different position if you took a margin loan. Loans from brokers aren't like bank loans. You can't repay them gradually, over many years.

"First-time or unsophisticated investors don't understand this," says attorney Mark Maddox of Maddox Koeller Hargett & Caruso in Indianapolis. "They think it's like having a mortgage or credit-card debt. They don't understand its severity, if their stocks go down."

If the value of your stocks declines, brokers may issue a "margin call." That means they want you to repay part or all of the loan immediately.

Prev

For reprint and licensing requests for this article, CLICK HERE.