Does the rate even matter anymore? As a homeowner it is a fair question to ask. We are in many respects in unchartered waters in terms of interest rates. It can give the industry this feeling that it will last forever. As the English author Geoffrey Chaucer once said “All good things must come to an end.” If that is the case, are we on borrowed time? The proverbial bubble about to burst?
History lesson, since 1971. Many homeowners do not remember the time when getting a mortgage at a high double digit interest rate was the norm. To offset that, you could also get a savings account or CD (certificate of deposit) at 15% to 20% as well at that time. However, when you look at the apex to today, you will notice two important items:
First, the data does not include where we are today. Right now, some have the ability to get a mortgage in the 2% range! This will be on the opposite end of 1982, when you were staring at 18%. What can we ascertain from these two points of data? Simple — they are on the extreme. Neither of these were the “new norm” for getting a mortgage during these periods of time. Fair point right? Is there much difference between the two? Yes, and it is extreme.
In 1982 and through the entire 1980s, consumer spending was very controlled. Credit cards, personal loans, installment credit was limited. Yes, people had department store charges, but consumer spending and debt was in alignment. Today?
“Their average consumer debt was $78,396 in 2019, a 58 percent increase from $49,722 in 2015. Millennials also carry an average mortgage balance of $224,500, the second-highest after Gen Xers, who have an average mortgage balance of $238,344. In terms of credit card debt, millennials’ balances are expected to climb.” This according to bankrate.com
This means that people are owing more and spending more and creating more debt today, than any time in history. So what happens when interest rates rise (and they will)?
Look at your own situation. Ask yourself, are your debts being eliminated or rising? Savings increasing or decreasing? Is the equity in your home at an all time high? Do you know? What will your financial picture look like when the rates do rise? Will it make sense to refinance then?
We are on borrowed time. Not because of some geo-political reason. It is a math reason. Nothing stays flat, low, high, or the same forever. When something is historically high like a stock, it is time to look to sell. When something is historically low, like mortgage interest rates while maybe your personal debt is at a historical high, it is time to refinance your mortgage! Time is of the essence, take action today.