Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, February 5, 1994                   TAG: 9402050092
SECTION: NATIONAL/INTERNATIONAL                    PAGE: A-1   EDITION: METRO 
SOURCE: Associated Press
DATELINE: NEW YORK                                LENGTH: Medium

HOW DOES INCREASE AFFECT YOU?

Adjustable mortgage rates will rise, but savers could earn extra interest on bank accounts. Long-term interest rates, though, could actually fall.

An explanation in question-and-answer form.

Q: Why did the Federal Reserve raise interest rates, and how much will this boost my mortgage payments?

A: The Federal Reserve, the nation's central bank, uses interest rate increases as a tool to keep inflation pressures in check. While inflation is low now, recent signs of economic strength have raised fears that inflation could accelerate. Higher rates tend to cool inflation pressures by making it more expensive for individuals and businesses to borrow money.

The Fed's move, reversing a five-year trend toward lower rates, had a swift effect on a variety of consumer and business rates.

Rates on one-year adjustable home mortgages briefly rose to 4.25 percent Friday from 4.22 percent Thursday before recovering, according to HSH Associates, a Butler, N.J., publisher of mortgage information. Rates on 30-year fixed-rate mortgages went up to 7.15 percent from 7.08 percent before also moving back - at least for now.

"What you got was a foreshadowing of the reaction we are going to get next week," said Paul Havemann, an HSH vice president.

Q: Sounds ominous. Does it still pay to refinance my mortgage?

A: Yes. Rates are likely to hover near 25-year lows for some time. A slight rate increase won't boost monthly payments on a $100,000 mortgage loan much more than $10 a month.

But refinance soon - the Federal Reserve is expected to raise rates again this year. Moreover, it may be smart to consider a fixed-rate loan, which would lock in the low rates, over a mortgage that adjusts every year or so.

Q: What about other consumer and business loans? Will they go up, too?

A: Eventually. Hours after the Fed moved, a large Chicago bank raised its prime lending rate, used to set loan rates for small- and medium-sized businesses and some consumer loans, from 5.5 percent to 5.75 percent.

The action was not copied by other banks but probably is a sign of things to come. Raymond Worseck, chief economist at A.G. Edwards & Sons Inc. in St. Louis, says other banks will start reacting after the Fed makes another minor rate increase, which he expects this year.

Not all rates may rise as a result of the Fed action, according to some economists. Some long-term loans, including 30-year fixed-rate mortgages, could experience rate declines. That's because low inflation, the Federal Reserve's stated goal, helps keep a lid on increases in long-term rates.

Q: What does all this mean for investors?

A: It depends. Savers could earn slightly higher interest on bank accounts. Likewise, rates on money market accounts, which invest in short-term securities, could rise slightly.

But these increases are not likely to make a big difference immediately to the millions of Americans who have invested in mutual funds to capitalize on the recently soaring stock and bond markets.

"It's probably not going to divert a lot of the money that has been moving into stock and bond mutual funds. The returns are so much greater that this move doesn't make that big a difference," said Brian Fabbri, chief economist of Fabbri Global Economics, a consulting firm.

That could change, of course. On Friday, the stock market plunged in reaction to the Fed's decision. While many strategists don't consider the stock rally over, the sharp reaction could mean investors are in for an unpredictable ride after a two-year bull run.