Watch Those Interest Rates

Construction loan debt is typically variable and tied to the prime rate, so the big drop in interest rates during the past year has benefited many builders and developers. But if the party hasn’t already ended, it will soon.

If you have been waiting to finance your personal or fixed corporate debt, you should probably spring into action. First, the Federal Reserve doesn’t have a lot of additional downside room to maneuver. Second, as soon as the economy and inflation show signs of heating up, look for the Fed to tap the brakes by raising interest rates.

If you are a debtor, consider refinancing with a fixed-rate mortgage when possible (i.e., available and affordable). If that is not practical because of commercial loans outstanding, budget higher rates into your 2002 and 2003 spending plans.

Those who are fortunate to be creditors can look forward to higher incomes only if your debt is variable. If you are going to become a creditor, consider your options in an environment of rising interest rates: Either use a variable-rate loan to be adjusted monthly or quarterly, or set a short loan term.