How to stay ahead of rising interest rates.(money)

The heady days of cheap money and near undetectable inflation may be coming to an end. Since the Federal Reserve raised rates a quarter of one percent in June, everyone, including your uncle Bob, has been predicting that the trend is now nowhere but up.

"The good news is that we're starting from historic lows in short-term rates, and if the Fed sticks with its pledge to raise rates slowly, the pain should be spread out over several years rather than coming in a big bite," says Keith Gumbinger, vice president at HSH Associates, a publisher of mortgage and consumer-loan information. If inflation heats up, however, sharp interest-rate increases could follow

Adjusting to what might be a new era of rising rates means taking a fresh look at how you manage your debt, including mortgages, home-equity lines, and credit cards. Here's how various types of debt might be affected, along with tips on how you can best position yourself now:

MORTGAGES

If you're buying a home, it still makes sense to go with a fixed-rate mortgage even though rates have gone up, says Greg McBride, senior analyst with Bankrate.com, an aggregator of financial-product information. But fixed doesn't have to mean locking in for 30 years. If, like the majority of homeowners, you move every seven years or so, McBride recommends hybrid mortgages, which have fixed rates for the first several years (commonly 3, 5, 7, or 10), then convert to a variable rate. Rates on hybrids are 1 percent or more below the rates on 30-year loans.

If you already have a one-year adjustablerate mortgage, consider refinancing at a fixed rate. "You want to avoid a rate adjustment in the next two or three years because those adjustments are likely to be fairly significant." McBride says. (For some examples of how high monthly payments can go if interest rates climb just a few percentage points in the next year or two--which is a reasonable assumption based on past trends--see the table below.)

Riskiest of all are interest-ouly ARMs, which are common in southern California and other areas where property prices have soared in recent years. "Lots of people bought more house than they could afford because they could swing monthly payments on interest-only adjustable-rate loans," says Howard Dvorkin, founder of Consolidated Credit, a credit-counseling agency. "If the Fed increases rates even incrementally, that monthly payment could double within three ...