subject: The Importance of Understanding the Impact of Rising Interest Rates [print this page] The Importance of Understanding the Impact of Rising Interest Rates
We are entering a challenging time in the interest rate cycle. The Federal Reserve Board has kept both short and long term rates at extremely low levels in an effort to stimulate growth. The recent printing of trillions of new dollars has flooded this monetary system with too much currency.
The next course of action is going to be to raise rates in an effort to shrink the current supply. The prime rate is going to be an immediate casualty of this move with consequences that are far reaching into our economy. The most immediate concern is the impact of the payment increase on home equity lines of credit. I have been strongly urging my clients to examine the realities associated with the impact that will occur once these rates begin to rise. Should home values continue to decline AND interest rates start to increase, it will serve to put individuals who are already equity strapped, into a possible point where they would be "stuck". The only recourse would be to attempt to modify the terms of their loans, which is more of a fantasy than a reality, walk away from the property because they can not afford the costs, or simply remain in the house and pour their disposable income directly into the maintenance of their mortgage and line of credit payments.
Why would anyone wait to see if this script becomes a real life movie? The logical choice is to sit down with a banking professional who can explain the options available TODAY, while rates are still extremely low. I have been encouraging my clients to look closely at the benefits of combining their first mortgage and HELOC into a 15 year mortgage. On average, most people have been reducing their current mortgage by 7years, saving close to $250,000 in principal and interest AND have eliminated that large credit card secured by the home. This is just as important, if not more than lowering your term, because it insulates you from the certainty of rates going higher along with your monthly payment.
I strongly suggest you examine your current housing exposure closely and position yourself NOW to avoid any challenges a rising interest rate environment might bring.
