Interest rates just rose. Should you worry?

Our historic-low interest rates just inched up a bit, creating big headlines.

Specifically, the Fed just raised its benchmark interest rate by .25 percent for the first time since 2006. This morning, prospective homebuyers find themselves ruminating over a lot of what-ifs.

  • Did I miss my window of opportunity?
  • Is buying a home a bad deal now?
  • What if rates keep rising?
  • What if rising rates erode the value of the home I want to buy (or already own)?
  • Will I be locked in my next home for decades?

Not to worry. The rate hike isn’t that big a deal. It’s only a quarter point. Rates are still at historic lows. The material financial impact figures to be negligible. If the quarter-point is carried over to mortgages, and there’s no guarantee it will, that’s $29 more a month on a $200,000 home.

The good news

Although that’s real money, the silver linings are just as real. First, the increase may push purchase prices down proportionally, depending on your local market conditions (if you’re in San Francisco, probably not). If you’ve got savings, higher rates may boost your interest income. And the hike itself is indisputably the direct effect of a healthier economy, which means your next pay raise or commission could cover the net cost of your money.

Even in the worst case, a 4.2 percent mortgage rate, up from 3.95 percent, would be incredibly cheap. When I bought my first home, the rate was 147/8 percent. From this chart, you can see what I mean (and triangulate my age):

But as I said, there’s no guarantee mortgage rates will even rise in the near future. If you’d like the gory details on that, The Washington Post explains:

This increase in the short-term rates controlled by the Fed could push up yields on the long-term bonds used to set mortgage rates. That could lead to higher borrowing costs for home buyers, but it’s not guaranteed. The 10-year Treasury bonds that directly affect mortgage rates are influenced by multiple factors, including inflation expectations and the global economic outlook. That means mortgage rates could actually come down even as the Fed is increasing short-term rates.  Indeed, when the central bank began increasing rates in 2004, mortgage rates actually dropped over the next several months. [Emphasis is mine]

Finally, buying today is still a better deal than renting, with the latter costing twice as much, all things being equal.

Be happy

So I say, don’t worry, but if you insist on scrutinizing variables that could affect your real estate wealth, add these to the list:

  • Your local economy. Is the big employer solid or might they leave town?
  • Institutional investors. Many single-family homes are owned by financial institutions that are renting them out. What happens when these properties trickle into the market?
  • Housing starts. I’m looking out my window and see cranes popping up from the New York skyline like weeds. If all this construction is rental property, what then?
  • Oil prices. How will they affect Houston’s prices?
  • Tech IPOs. How will they affect San Francisco’s?

I could go on. My point is this: You could make a very long list of things that will affect your home value either way. And no one really knows how these variables will play out. Solid predictions are beyond the reach of most pros like myself, which is why financial institutions offer derivatives to hedge one’s investments.

Just don’t worry about these things. What’s more important is how your life plays out. That’s why I started this company. We believe that, like the banks, you should be able to protect your investment – your down payment in a home. That’s only fair. This way, you really don’t have to worry.

So keep it simple: Remove the risk and live the life you want.

Joe Melendez
CEO and Founder