Higher Rates, Good or Bad?

by Hassan Nicholás

High Rates, Good or Bad?

When one gets wind that interest rates are rising this could produce a myriad of emotions, some more pleasant than others. For the credit-strapped borrowers looking to take advantage of falling home prices a hike in interest rates could be a deterrent, or rather, the determining factor that could break the camel's back. Hopefully, by now we all know (or should know) that our mortgage payment is PITI..Principal, Interest, Taxes, & Insurance. Accordingly, interest rates affect the size of our monthly mortgage. So, should we be alarmed then when the Fed has risen rates? Would it then be safe to say that any savings we would have realized from a discounted purchase price would be negated? To be fair, let's make sure we understand that when the Fed talks about lowering the "rate" it is referring to the Federal funds rate, which is not the same as the mortgage rate. Now, let's look at how a rise in interest rates will affect certain groups of people.

Investors - High interest rates means you can invest your money at a higher rate of return, right? OK, but the interest rate you get paid on investments is tied to the Federal funds rate, which will be lowered March 18th. So, even if rates for 30 year mortgages are rising, currently, you will still be earning less on your investments.

ARMs/IO/Open Option ARMs - If you happen to have an ARM, Interest Only or Open Option ARM that's due to reset in a few years you could very well count on a jump (sometimes very substantial) in how much you'll shell out a month for your mortgage. You've been warned.

Buyers - It's best to buy when rates are higher and prices are lower. You'll have more interest to write off for tax time (plus, additional tax credit using a Mortgage Credit Certificate, if you qualify), greater chance to refinance later for a lower rate, and then the added incentive for sellers to lower purchases prices.

It really all depends on which side of the fence you want to be on.

Many mortgage experts believe rates will be at a standstill at least for the short-term (next 45 days). However, there are those that believe rates will drop and another minority that believes interest rates will rise. Catch the discussion on BankRate.com to see what the experts and analysts are saying.