Stock photo licensed from iStockphoto.com

Budget for Rising Interest Rates

Posted June 30th, 2009 under pitfalls, smart buying, money matters.

With interest rates at a historic low, affordability has never been so great. Someone who could barely afford a $150,000 home when interest rates were at 9% can now qualify for a home of $235,000 at 4%.

However, low rates can be dangerous if you don't budget for rate increases. Consider that when interest rates were at 9%, a rise of 2% would cause your payments to increase by 16% when you renewed. This was hard to swallow, but manageable. However, a rise of 2% from today's rates - something which could happen in the next two or three years - would cause an increase of 21% in your payments, which is not as easy to handle.

The moral is, when buying a home today, leave a cushion of at least 5% for the day when higher interest rates arrive. That day is surely coming.

Got questions about interest rates, mortgages, and your budget? Just ask me, I'll be happy to help.