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Act fast and low inflation, interest can work for you

Surely you've read where the experts are predicting low inflation for the rest of 1994 and maybe even beyond.

But how will that affect you? Especially when all folks know about inflation is that the loaf of bread that once cost 25 cents now costs a buck-and-a-half.

Others believe that high-level forecasting is designed only for economic gurus who wear starched collars and push computer buttons.

Not so. Low inflation could be great news for your wallet. If you're smart, you'll start adjusting your personal financial game plan to fit the new numbers.

If you're a saver, inflation has been eating into your low interest rates to where you've lost money over the past two years, according to figures from Bank Rate Monitor.

Here's how: Say you've been a $10,000 investor. The typical one-year CD has paid an average of 3.5 percent since the start of 1992. Assuming you're in the 28-percent tax bracket, your after-tax return has been 2.5 percent, or $250.

Now subtract inflation, which has been running at an annual rate of about 3 percent over those two years. Bingo! You've "lost" half a point, or $50 in interest each year on that $10,000. In other words, you're in the hole.

On the borrowing side, low inflation presents a slew of new opportunities to cut costs _ if you take advantage of the situation.

Last year's U.S. inflation rate turned out to be 2.7 percent; the economists' '94 consensus is for a rate of 2.8 percent or thereabouts.

Assuming these wizards are right, how should you move your money around? What should you invest in? What should you pay off or refinance so that you'll come out ahead?

Let's pretend you have that same $10,000 in bank savings accounts and, thanks to the recession, have racked up $15,000 in debts.

To get your savings yields ahead of inflation, you might consider stretching CD maturities. A one-year CD now returns about 3 percent before taxes and inflation, according to BRM, but a two-year CD pays closer to 3.5 percent.

With a little shopping, you should be able to find an institution paying 4 percent. After taking out for taxes and inflation, your return will be just above 0 percent, but at least you'll stop losing money.

On the borrowing side, let's say you owe $10,000 on a car loan at 10 percent. You also have credit card balances totaling $2,000 at 17.5 percent. Plus you have a personal loan of $3,000 at 15 percent.

On average, you're paying about 12 percent on that money, or as much as $1,800 in interest on the $15,000.

Take all three and roll them into a home equity line of credit and your rate should drop to around 7 percent. That will remain fairly steady because most home equity costs are tied to the banks' prime rate. Even if the Federal Reserve doesn't force short-term interest rates higher, prime probably won't move. If the Fed does act, prime might stay in place as banks compete for loan business.

Assuming that you can deduct the home equity interest paid at the same 28-percent tax rate, the net rate is about 5 percent. The annual interest cost plunges to $750 or less.

Both home buyers and owners can win with low interest rates. Buyers have extra time to shop lenders because odds favor 30-year fixed rates hovering around 7 percent. That's $665 a month on a $100,000 loan.

Homeowners will have to move faster, though. The refinancing boom is coming to an end because almost all the people who could benefit from a lower mortgage rate have gotten a new loan. The rest, those folks with 30-year fixed rates between 8 percent and 9 percent, will have to wait for the next dip in the numbers.

Let's say you've already refinanced once and are now paying 8.5 percent on a 30-year term. This year, keep an eye out for a downturn in mortgage rates; it may be brief, but if 30-year rates fall to 6.5 percent, you can refinance a second time. On a $100,000 mortgage balance, your monthly payment will fall about $137 to $632.

Bottom line: A combination of low inflation and signs of a stronger economy bode well for the nation's future. But you're not going to get a piece of the action unless you adapt your personal financial strategy _ starting now.

Latest rate trend: Savings yields hardly budged this week, as Bank Rate Monitor's ratio of decreases to increases narrowed to 3-to-1 from 4-to-1 last week. The average 30-year fixed-rate mortgage dipped to 6.85 percent from 6.93 percent.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.