Interest Rate Increases – Effect, Likelihood and Perspective
There is a lot of talk once again about rates increasing, especially b/c the Fed is indicating they will try to push rates up in December. But here is some perspective.
The Fed may not be able to push long-term rates up. When the Fed increased the short term Fed Funds rate last December, it had the paradoxical effect of decreasing long term rates. Mortgage rates actually ended up going down. I won’t explain why this happened here, but this could likely happen again, as economic circumstances worldwide have not changed.
Rate increases do not affect payments as much as people think. Our average loan amount is around $500,000. A quarter percent increase from 3.75% to 4.0%, for example, increases the monthly payment by about $70. In San Francisco, that would about cover two lattes and a scone. I am kidding (slightly), but after tax benefits are accounted for, that is not much for most of our borrowers.
Historical Perspective: Rates were over 10% for most the 1980s; Rates were close to 8% for most of the 1990s; and anything under 7% was considered amazing prior to the mortgage meltdown of 2008. Today’s incredibly low rates remain an enormous gift that should not be expected to last forever.
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