How Much Does My Interest Rate Really Matter?

Inflation is the big problem this week, and it's pushed mortgage interest rates to their highest level in 2 months. Today's market news - bad earnings from nearly everyone and higher-that-expected jobless claims - should push bonds higher, but right now the market traders have decided that stocks are good and bonds are bad, and nothing is going to change their minds, apparently. So let's spend a moment talking about interest rates, and why they are NOT the end-all and be-all of mortgages.

First, interest rates aren't very high, on a historical basis. 6.25% sounds like a lot, but most people can remember 7.5% fairly recently, and some can remember 12%. Business still got done.

Second, let's look at the real difference between 6.25% and 6% mortgage interest rates. On a 30-year mortgage, beginning balance of $250,000, the payment difference is $41/mo ($1498 vs $1539). That's less than $500/yr, or .1% of the gross annual income of a typical homeowner for a home with that kind of loan. Suppose your company comes to you and says "in order to cut costs and keep the company alive, we're going to have to cut everyone's salaries. The cut will be .1%. Please don't kill us." Anyone going ape over that? Over what amounts to one family trip to Wendy's every month? Yet there are borrowers that have attempted suicide when their rate rose by an unexpected .25%.

Third, keep in mind that on fixed-rate loans, you pay with the house's money, to use a gambling term. Every year inflation rises, and that means that every year the effective payment on your mortgage DROPS. Know how we talk about "real dollars" as a way to price things? That, say, gasoline, despite its huge runup recently, is still cheap in 1975 dollars (costs less now than it did then, actually)? Well, in 2015, you're going to be paying your mortgage with 2015 dollars, and if things go the next 7 years the way they have the last 7, that will be the equivalent of paying only $1249, a $250/mo cut in real dollars, more than 6x as much as the difference between 6% and 6.25%.

Bottom line? Don't panic when rates rise. If you're refinancing, just hold your cards, tell us what rate you want, and we'll tell you when it gets there (hey, a stockbroker for mortgages - for FREE!). If you're buying, just buy. The cost of a new heater will be 25x as much as any difference in your interest rate, so don't waste energy on irrelevant things.

30-year rates at 6.25% this morning, although there are bonuses for credit over 720 and for larger loan sizes and for lower loan-to-value ratios, so you need to check with a pro to know where you are for sure. Bryan - still 6.125%. Hang in there.

Cj

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