Local consumers anticipated rate increase

July 1, 2004

For some financially savvy consumers in the region, yesterday's decision by the Federal Reserve's Open Market Committee to raise interest rates was no surprise.

Sensing that the days of borrowing at historically low rates were coming to an end, many of them have closed on deals the likes of which they don't expect to see soon.

"I bought a car in January because I knew that was going to happen," said Stacy Lynn Presha, 48, of White Plains. Presha, who works in a government program that distributes funds for public service programs, likes to live frugally. Her new Toyota Corolla replaced another car she had driven for more than 10 years.

"People need to learn how to keep it simple," Presha said. She learned the hard way when she was younger and had 13 credit cards, she said. It was an experience that made a lasting impression.

"It took me eight years to pay them off," she said. "All you need is one disaster, and you're behind the eight ball again."

In Garnerville yesterday, Roger and Judy Goldstein were settling into a new house they plan to share with their son and daughter-in-law and their 2-year-old grandson. With four bedrooms, two baths and room for renovations, it's larger than their former house in Pomona.

The growing family was glad to close when it did because mortgage rates started to inch back up this year.

"That was like a race to the finish line," Judy Goldstein said. The family closed at a 6 1/8 percent fixed rate for 30 years.

"Obviously, we didn't get in at the bottom, but things happen as they happen," said Roger Goldstein, 60, a retired biochemist who formerly directed quality assurance at Barr Pharmaceuticals Inc. in Pomona. "I'm satisfied with where it's at."

The Fed agreed yesterday to raise the federal funds rate, the rate at which banks loan money to each other, by a quarter percentage point, to 1.25 percent. The rate previously had been at 1 percent for a year, a low point it hadn't fallen to in 46 years.

The Fed's earlier rationale for lowering the rate was to spur economic growth that had waned in the wake of recession and the terrorist attacks.

The decision to raise the rate led to a boost yesterday in the prime rate by a quarter percentage point, to 4.25 percent. The prime rate is the interest rate that banks charge their best customers, and it often is used as an index point that's linked to consumer borrowing of all kinds.

The days of low interest rates haven't benefited consumers across the board. Senior citizens living on investments linked to those rates, such as certificates of deposit, have suffered as they fell.

Betty Ercoli, a White Plains resident who retired from the city's Building Department, was drawing $600 a month in investment interest in 2001, a figure that has dropped to $225 today.

"It's been three years of quite a bit less income," Ercoli, 75, said while taking a walk in the city's downtown with her young grandson. "You think that will supplement your Social Security, but there's a difference between $400 and $200."

The lost income has meant putting off spending on house improvements or trips out of town, she said.

"The things you would plan to do, you procrastinate and say, 'I'll wait for things to get better,' " she said. "For people who have investments, the interest rates would help us if they were higher."

But not all investments do well in periods of rising interest rates.

Robert A. Rifkin, an attorney who lives in Rye Brook, said he has been advised by his broker to avoid selling his bonds and similar long-term investments. Bonds often fare poorly in rising interest rate climates, since new securities that command higher rates are more valuable than previously issued bonds that pay less interest.

Rifkin has no immediate need to cash out, but in a year, his son plans to attend college. Rifkin said he plans to take out a home equity loan, his first since he bought his house 15 years ago. With rates going up, he figures the interest on the loan next year will run him about $500 to $1,000 more over the life of the loan.

No friend to credit card debt, Rifkin likes to pay off his balance each month. He's read that to pay off a $1,000 balance on a credit card can take four years if the borrower is only paying the minimum each month.

"I just can't picture that," he said.

Cindy Short, a White Plains bookkeeper, locked in a credit card rate of 3.99 percent after consolidating debt from other cards. Being a bookkeeper has helped her watch her personal finances more closely, she said, but other people also are sophisticated about their bottom line.

"I think people are becoming much more cognizant of how they spend their money," said Short, 58. "The economy is not good now, and I think people have got to be aware of that. When you pay $4 for a gallon of milk ... your money does not go as far as it used to."

With mortgage rates climbing, some home buyers have decided to borrow at adjustable rates. Those mortgages are often sensitive to rising interest rates, but the prospect didn't discourage Sean and Amanda Gunning from taking one out to buy a new townhouse in Nanuet.

"We've been hearing that things are getting better and, therefore, rates are going bye-bye," said Sean Gunning, a 30-year-old sales manager at Verizon. The couple closed last week on their new place after obtaining an adjustable rate mortgage at 5.875 percent. The rate changes to the market rate after seven years, with a 5 percentage point cap on the increase, he said.

Is he worried that rates will top out in seven years? Gunning is philosophical.

"Like everything else in life, it's a gamble," he said. One thing that was certain to the couple was that rates are inching up now, he said.



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