How the U.S. downgrade could affect you

Monday, August 8, 2011 | 6:27 p.m. CDT

After more than four years of a housing market crisis and major changes in credit card terms, it may be hard to believe that many consumers don't know what types of loans they have.

Do you have a fixed-rate mortgage or an adjustable-rate mortgage? What might cause your interest rate to change? How often could it adjust? And what about your credit cards? Do they have a fixed or variable rate?

Research shows many people can't answer these questions.

"An amazing number of people don't even know if they have an ARM or a fixed rate," said Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

Those details are spelled out in the note that a homeowner signs at closing. But like the rest of the pile of papers that pass by during a closing, it's often a document that gets a once-over and then gets filed. And for credit cards, the booklet of terms that's mailed once or twice a year often doesn't even get that cursory level of review. It's just dropped in a file or thrown away.

Here are some questions to ask as you try to assess whether your loans could be affected by the market turmoil:

  • Can my interest rate increase?

If you can't find the note in your mortgage packet, contact your bank and ask if the rate on your home loan is adjustable. For credit cards, if you tossed the last update of your terms, you may find some details on your statement or you might have to call the number on the back of your card.

  • What benchmark or index is my loan or card tied to?

Mortgage rates are often directly tied to the yields, or interest rates, on Treasury bonds. This makes home loans the most vulnerable to the downgrade of U.S. debt. However, so far there's been little evidence that investors view U.S. treasuries as risky investments. That perception would have to change in order for interest rates to climb significantly.

Home equity loans and credit cards are more often linked to the prime rate, which is less likely to change based on the downgrade.

  • How much might my monthly payments increase?

Many adjustable rate mortgages set caps on how much interest rates or payments may rise. For credit cards, existing balances are protected from rate hikes even on variable rate cards. But new charges would carry the higher rate, which would drive up payments.

  • How many times per year can my rate adjust?

Home equity loans are most likely among consumer borrowing to adjust on a monthly basis, followed by credit cards.

Mortgages often have limits on the number of times per year rates can change, but that varies widely depending on the source of the loan and when it was opened.

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