What Happens When Interest Rates Go Up? 

As I go about the business of getting ready for the day the Today show is generally playing in the background, if something peaks my interest I wander out to stand in front of the TV and watch want is being discussed. Today Show financial experts, Barbara Corcoran and Jean Chatzky bantered back and forth about the pros and cons of renting vs. buying this morning. I don’t always agree with Corcoran but she’s always interesting.

They claim that 40% of the population is now a renter. I’m not so sure the ratios are this high in Ada County. Friends of mine will attest to the jump in rental rates. These friends recently lost their current rental because it was foreclosed on and where left trying to find something comparable in the same school district. They found rents up between $200 – $300 a month over a year ago (hopefully their home will sell soon so the can buy here!). Need I say more, the rental market will continue to tighten up, especially for single family homes. There is a pool of people who will never qualify to own a home and many simply have no desire to own the ‘American Dream’.

Barbara and Jean talked about interest rates as well which are still incredible (although inching up a bit this past week). A statistic they tossed to the viewers this morning was that a mortgage payment 10 years ago on a $200,000 loan would have been $1,700 a month vs today’s payment which would be $955! WOW!! Rates are so incredible I think people are starting to take them for granted and assume this will continue. Jean Chatzky pointed out a 1% variation in interest rates is worth 9% in home value and said do the math…so I did. I don’t think interest rates will go down further but the bond rate will increase and interest rates will go up. So if Jean’s calculations are correct and interest rates go up 2% to 6.37 (which was typical 5 years ago) and if at today’s rates you could afford to buy a home for $200,000 with an increased interest rate of just 2% your buying power DROPS to $164,000!

Waiting for prices to drop another $10k may end up leaving you out in the cold or simply paying higher rents to the people with forethought.