Fed Moves Would Hit Consumers

The borrowers who will be affected are those who hold loans that adjust after a short period of time, such as monthly, every three months, every six months or once a year. "Mortgage delinquencies will probably rise a bit because of the Fed moves," said Doug Duncan, senior economist with the Mortgage Bankers Association. "People have to adjust to the process of adjustable-rate products. Delinquencies are always higher with ARMs."

The mortgage bankers' group predicts that the Federal Reserve will increase short-term rates a quarter of a percentage point three times before the end of this year.

Another group of homeowners facing higher payments are those like Higgins and Kohan who hold loans tied to short-term interest rates such as the prime rate.

Home equity lines in particular are commonly tied to the prime rate, which is now 4 percent but is likely to rise along with any Fed rate increase.

By the end of 2003, Americans held $375 billion in home equity loans and lines of credit, according to figures from Freddie Mac. For every quarter-percentage-point increase in the prime rate, the amount of additional interest payments owed by these borrowers would jump by $938 million over the course of a year, Nothaft said. "It does add up."

Most borrowers don't seem that concerned yet, though. Many are paying a lower interest rate on their home equity lines and construction loans than they are on their primary mortgages.

"What's there to worry about?" asked Carrie Staples, a mortgage broker at Sigma Financial in Bryans Road, Md. "Short-term rates have been ridiculously low for such a long time. We've been living in a fantasy world."

Staples said that payments on her own home equity line of $75,000 will go up only $31.25 a month with a half-point rise in short-term rates.

And Nothaft said most home equity lines of credit are not that large, generally about $20,000. Economists said those homeowners concerned about rising payments on their variable-rate loans should either roll their home equity lines, loans or construction loans into their primary mortgages or try to pay down some of the outstanding principal.

Higgins isn't panicking but feels the time has come to try to reduce the principal on her home equity line. Rates "are going to continue to go up. It's just that time" to take action.