Households Face Tough Decisions

The dawning of each new year brings with it a fresh round of opportunities and perils. Increasingly for families, the new opportunities and perils are economic, to which the best response often isn't obvious. Nonetheless, meeting these challenges is the key to security in a society in which people are far more dependent on their own resources than they have been in decades.

Americans this year can expect to see interest rates continue to rise off the historic lows they hit in 2005 -- a trend that affects borrowers and savers alike. Changes in medical insurance, begun in the past couple of years and involving an odd combination of more government and more individualism, will accelerate. Energy prices show no sign of returning to the lows that society grew happily accustomed to in the late '90s and early 2000s.

Traditional pensions -- the kind that promise a lifetime income to retirees -- remain under pressure. More seem destined to be eliminated or frozen or converted into plans that look a lot like 401(k) or other savings plans.

On the legislative front, Congress is in complete disarray over taxes. Many benefits for a wide range of taxpayers have expired or are about to, and the two chambers have not been able to agree on what to do. Taxpayers have no choice but to wait and see what the lawmakers do when they come back for the new session. However, some of the mechanisms set in place in 1997 or 2001 will continue to adjust brackets and rates, easing the bite on certain taxpayers.

If there is a theme to the coming year, it is uncertainty, making the decisions families have to make tougher than ever. Here are some suggestions for the new year:

Mortgages and Other Loans

The market is sending up warning flares to homeowners who bought or refinanced using one of those interest-only adjustables or other brave new mortgages that seemed like a good idea at about this time last year. Fortunately, the warnings are coming when there's still time to do something.

Thanks to unusual conditions, rates for long-term and short-term loans are about the same. For now that means that mortgage rates are continuing to hover in the vicinity of 6 percent even as rates on credit cards, home equity lines of credit and similar borrowings are rising. In these circumstances, homeowners with esoteric loans still have a chance to grab a good ol' 30-year fixed-rate mortgage and lock in one of the lowest interest rates seen in decades.

Rising short-term rates also are a message to get rid of other kinds of debt. Holders of variable-rate home-equity lines of credit have likely noticed their monthly payments rising. Since many of these are interest-only, such rises may seem painless, but consider: At some point these borrowers are going to have to repay the principal, and if they plan to do that with more borrowing, such as refinancing it into a bigger mortgage, they need to think about what conditions will be like at that point. With long-term rates still low, now may be a good time to do that.

Those who have the cash to pay the loan off now should consider that. Having a line of credit at 3 or 4 percent is one thing, an opportunity to invest and do better, perhaps. But at 6 or 7 percent, the chances of winning at that game are greatly diminished.

Holders of student loans should consider consolidating them. Consolidation is tricky, and should be explored carefully, but does allow borrowers to lock in a fixed rate. Consolidation also allows borrowers to lower payments by stretching out the loan, though that lengthening generally means paying more in total interest.

Finally, if you are carrying credit card debt, paying it down is always a good idea.

Health Insurance and Medicare

Cost pressures from medical insurance continue to rise on employers, causing them to search more vigorously for ways to save. Workers will be, if they haven't already been, asked to bear more of the costs through higher premiums, co-pays and deductibles.