I was alive in the early 80’s but I wasn’t worried about my mortgage payment. I was busy watching ET and playing little league baseball. But to hear people who are just a little bit older than I am, getting a 30 year mortgage at interest rates in the high teens in the early 1980’s wasn’t uncommon.
Assume for a moment that inflation kicks in and at some point in the future, the average rate that you see quoted on a 30 year fixed rate mortgage is 10%.
What does that do to your buying power?
If interest rates rise to 10%, your monthly Principal and Interest payment on a $200,000 mortgage will rise by $742/month.
Although I don’t remember what 10%-20% interest rates felt like, I can remember well what 7% interest rates felt like – it wasn’t that long ago! If interest rates rise to 7%, the P/I payment on a $200k loan will go up by $327 per month.
Are we going to see 10% interest rates in the foreseeable future? I don’t know, I will leave that to the experts to pontificate about. What I can say for certain though is that as interest rates rise, people are going to buy “less of a house” than they are currently buying.
And I wonder what that will do to real estate prices…
{ 3 comments… read them below or add one }
Justin – my second home that I built was in 1987 and the interest rate was ridiculous and made our payment shoot over $1200.o0 month back then for a 150K loan, you can do that math! It was an adjustable rate but still killer! I hope they never go up like that again!
All of the smart people I know say that they are going up, it is only a matter of when and how much.
Let’s just hope it is nothing too crazy.
Justin,
Like you, I was too young to experience first-hand the high rates of the early ’80′s. However, although I thought ET was cool, I was more of a Indiana Jones and Return of the Jedi fan.
A couple of older battle-proven loan officers were discussing the current market with me this week and they also anticipate a high level of inflation with a significant increase in interest rates within the next few years. In fact, one of them is currently in the process of refinancing his conventional loan to a VA loan simply to take advantage of the fact that it will be assumable. He noted that in the early 80′s, houses that were listed for sale that had assumable mortgages sold significantly faster than those that did not. I think that people need to be made aware of the assumption feature of FHA and VA loans and advised as to how it could mitigate the potential market risk related to high interest rates.
I know that I personally would rather assume a loan at 5.5% than try to obtain a new one at 10%.
Steve