Suze Orman Money Matters

There they go again. In late March, the Federal Reserve raised its short-term interest rate, the Fed funds rate, for the 15th consecutive time since June, 2004. Over that stretch the rate has climbed from 1 percent to its current 4.75 percent.

And it ain't over yet. With the latest hike, the Fed signaled they may push the rate up some more. The next potential change comes in early May.

This Fed tightening could make your life much more expensive. If you have an adjustable rate mortgage, a home equity line of credit, or carry a balance on your credit card, your expenses have taken a sharp turn for the worse over the past few years.

Simply taking it on the chin and waiting for rates to turn back in your favor is a huge mistake. Rates aren't expected to start falling any time soon. So it's time to Fed-proof your finances.

Hitting Home

The rate hike's biggest impact is on the many people who took on an adjustable-rate mortgage over the past few years. The low intro rate that helped make the purchase affordable was nice, but you're on the verge of getting smacked silly when your mortgage comes up for adjustment because your new rate is linked to the Fed funds rate.

For example, anyone who took out a mortgage three years ago and chose a 3/1 ARM --meaning you locked in your rate for the first three years before the lender was allowed to hit you with an adjustment -- probably snagged an interest rate of around 3.5 percent. You're now looking at your rate jumping to 5.5 percent at your first adjustment. Actually, it could have been a lot worse if your mortgage was simply tied to the rise in short-term rates, but you'll be saved a bit by the self-imposed 2-percentage-point maximum annual increase that most ARMS have.

On a $250,000 30-year mortgage, that means your monthly cost will rise from $1,123 to $1,419. That's nearly $300 a month. And more pain may come a year later. Unless the economy totally falls apart and the Fed starts lowering rates -- and that's not expected -- you could get hit with another rate hike near the max of 2 percentage points. Then, you'll be looking at a monthly mortgage payment of $1,748.

The Mechanics Behind Your Mortgage

The rate on your ARM is tied to an underlying benchmark index. Check your loan docs to see what index your lender used for your loan. One of the most popular ARM indexes is the 6-month LIBOR index (that's short for London Inter-Bank Offered Rate; which is what banks on the other side of the pond charge each other).

The LIBOR is typically about half a percentage point higher than the Fed funds rate. Right now it's 5.1 percent. But that's not your ARM rate. Your lender takes the LIBOR and adds a "margin" -- meaning a markup -- that's typically 2.25 percentage points. Add that to the 5.1 percent LIBOR, and you're at 7.35 percent.

Your best move at this point if you plan on staying in the home for a few years is to refinance into a fixed-rate loan. That said, you don't necessarily need to go for the 30-year fixed rate mortgage. I still like Hybrid ARMS where the interest rate is fixed for a long period. For example, if you anticipate moving within the next 10 years, consider a 10/1 ARM. The current rate is a little bit lower than on a 30-year loan -- 5.9 percent vs. 6.2 percent -- and that rate won't change for the next 10 years.

HELOC Suffering

Anyone with Home Equity Lines of Credit (HELOCs) is feeling a similar financial pinch. That's because just like an ARM, your HELOC rate is pegged to a short-term interest rate that moves in lockstep with the Fed funds rate. In the case of HELOCS, the benchmark rate is the Prime rate, what U.S. banks tend to charge each other for loans.

Every time the Fed funds rate rises, so, too, does Prime, and your HELOC interest rate. Over the period where the Fed funds rate has jumped from 1 percent to 4.75 percent, the Prime rate has done its own jump from 4 percent to 7.75 percent.

The HELOC margin varies from lender to lender. Some may charge Prime +1 percentage point, but it's also common to see Prime + 3 percentage points. If you have a Prime + 3 HELOC your interest rate is now heading past 10 percent (see current loan rates here).

HEL May Be Better

Another often overlooked problem with HELOCs is that there's typically no maximum annual hike you can get hit with. Unlike ARMs, where the damage is typically limited to two percentage points a year -- and six percentage points over the life of the loan -- your HELOC can adjust any amount based on what Prime has been doing, and the adjustments are within a month of any Prime hikes.

If you have a HELOC, you're already taking it in the wallet. And it probably isn't going to ease up any time soon. If you can't get the HELOC paid off and you plan on staying in the home for a while, think about refinancing the debt into a fixed rate.

If you anticipate tapping some home equity in the future, please check out a home equity loan (HEL), rather than a HELOC. A HEL is basically a second mortgage. Unlike a HELOC, where the payments start only once you draw from the account, a HEL gives you a lump-sum loan from the get-go, and you must start making payments immediately, just like with a regular mortgage. But the interest rate on a HEL is fixed -- in this environment, it may be your better option. Still, have a lender work through the math with you, including the fees you will pay to get a HELOC v. a HEL.

Credit Squeeze

If you carry a balance on your credit card, you're also feeling some Fed pain. That's because credit-card issuers are aggressively switching customers over to a variable interest rate, rather than giving them a fixed rate on their credit-card balances. Be sure to check the annoying small print in your next statement -- issuers can switch you from fixed to variable with just 15 days notice. According to Bankrate.com, about two-thirds of all credit cards now carry a variable rate.

And you've guessed it: Those rates are typically tied to the Prime Rate, which in turn moves with the Fed. The average variable rate right now is 14 percent, or about six percentage points above the Prime Rate. A few years ago, the average was just 10 percent. If you have a FICO score below 700 or so, your rate is going to be even higher than the 14 percent average. And remember, the rate on cash advances will always be higher than the rate on your regular charges (use this calculator to see how rate changes will affect your payments).

The nominal silver lining in this is that if your current card annoys you enough, there's another card dying to entice you to switch with the lure of a zero-rate balance transfer. If you carry a balance and have a variable rate, or your fixed is converting to variable, consider transferring your balance to a different credit card (check out Yahoo! Finance's card finder to look for a better option).

A Permanent Solution

But be sure to check out what that rate will rise to once the introductory period is over. And make sure you understand what does and doesn't qualify for the zero rate: Typically, it's only the amount you transfer that's given the free ride. All your new charges will probably have a different rate that can be 10 percent, 15 percent, or more.

The Discover Platinum Card is a rare bird: The zero percent is good on the amount you transfer and new purchases for the first 12 months. The American Express Blue card offers you 3.99 percent on your transfer and zero percent on new charges for up to 15 months. But they, too, are variable after the introductory period expires. If you make that move, do your best to get the balance paid off before then, or consider transferring again.

While transferring balances can work for a while, it isn't really going to solve your problem. The best solution is to get rid of that credit-card balance. If your interest rate is more than 10 percent the best investment you can make is to get rid of that expensive debt.

I know it takes time, but that makes it all the more important to get started this month: Stop adding to the balance and commit to adding an extra $50 or $100 or whatever you can muster to your payment. Keep it up and you can cut down your payback period by years and save yourself thousands of dollars in interest.

Some Upside to Rate Rises

After all that tough news, I want to mention the one nice upside to the Fed rate hikes: You should be able to earn at least 4 percent or so right now on your emergency cash fund or any other low-risk savings accounts you have. The same laws apply: As the Fed funds rate climbs, so too should the interest you earn on short-term bank accounts such as money markets. I say should because not all bank accounts are quick to make the changes.

If you're still earning 1 percent or less on your savings, you should to move your money as soon as possible to a higher-yielding bank account. Online savings banks including emigrant-direct, ING, and HSBC offer some of the best yields around.

You can even lock in a 5 percent interest rate with a one-year CD right now. If you're saving for a goal that's at least a year away, you can opt for a CD and pocket even more interest (check out CD rates on Yahoo! Finance).

And be sure to keep your eyes peeled on Washington -- any changes in the Federal funds rate has a direct impact on your wallet.