The Expert Podcast

So, what will it mean if and when mortgage rates hit 10 percent? Well, first of all, before we get to that and how to calculate your payment, look at the historical chart of mortgages. If you go back from the late 1970s, this chart starts at 1972, and the rate at 10 percent is this line right here. Rates were eight, nine, and ten percent for a good part of 30-some odd years, until we get into the early 2000s. So, roughly 30 years. Now they go below eight percent, so for the last, let's say, 50 years, half the time rates were at or about 10 percent, and half the time they weren't. Keep in mind that this period of time here, from the early 80s until the mid to late 90s, was a period of high inflation and unemployment. Does that sound familiar? Those are times like we're facing now. So, this is the reason why the rates may go up near double digits. Right now, they're roughly at seven percent, and the Fed just announced another three basis points or 0.75 interest rate increase, which will bump the rates up even a little higher.

What’s that going to do for payments? It’ll be very easy to calculate mortgage payments once rates go up that high. Let’s take a look. Here’s your mortgage calculator. If you put in a loan amount of $390,000, it gives you a monthly payment of $3,400. So roughly, once you’re at 10 percent, you can calculate your payment by just taking the amount you’re financing and chopping off two zeros, right? So from $390,000 to $3,400. It’s a little bit less than that, but by the time you figure in taxes, insurance, you’re going to be more than that anyway. So, you know, roughly one percent of your amount is what you end up having for a mortgage payment, which makes sense because a 10 percent mortgage over the course of a year, over 12 months, averages out to be that amount. So, it’ll be very easy to calculate your payment. That way, if you’re looking at a $500,000 house, your payment will be $5,000. If you’re looking at a $650,000 house, your payment would be $6,500, and so on.

I can remember back in the 80s, instantly being able to figure out a mortgage payment by just chopping off two zeros off the amount you’re financing. So a $260,000 house would be $2,600. This is going to help really guide the economics of purchasing a home and comparing it to rent by putting the payment in perspective of what it does compared to rent. Because a landlord or property owner needs to get a certain return on their investment, and that return is going to be also figured in a percentage. So, if you have a $500,000 house, how much do you need to make in order to have that be a viable investment once you pay your interest, your taxes, insurance, maintenance, upkeep, vacancy rate, right? So, a 10 percent mortgage rate is going to have an effect on both the price and also rental rates. And it may be the opposite of what you think. Sometimes people think that a higher interest rate will reduce home values. Well, keep in mind in the 70s and 80s, when interest rates went up, sometimes 15-16 percent, housing prices didn’t go down. There wasn’t really a housing crash until the late 80s, and it was a small blip. It popped right back up in the 90s.

So, mortgage rates may not have the same effect on supply and demand as what you might think for other commodities, only because people need to live in a house. Other things you can use as discretionary purchases, whereas real estate, you need a roof over your head. Everybody needs one, and you have to pay something to get it.