Are Low Interest Rates Good?

Hmmm... It seems obvious that low interest rates are good for everyone. But wait a minute!  Your savings account at the friendly bank is paying less than 1%.  How does that help you?  You can get a 3 year ARM mortgage for 3.75%: that seems good, doesn't it?

I've been thinking about all of this and it seems that low interest rates may not be so good after all.  It depends, of course, on your personal situation and an assessment of the short-term verses long-term ramifications.  Here are a couple of examples to consider:

1. If you have the funds for a down payment of 10% on a $300,000 home and the interest rate is 5% on a 15 year mortgage, that would seem like a pretty sweet deal.  But you also have to consider the impact of changes in interest rates on the valuation of the home you might buy.  Let's say, for instance, that interest rates climb to 8% in the next two years and you want to sell your home. The difference between a 5% mortgage payment on $270,000 and an 8% mortgage payment on that same $270,000 is almost $500 per month.

Now, if anyone has to pay $500 more per month to get the same home, you likely will want to pay less for the house and thus lower your mortgage payment (this is true of your next home and it is true for the person who might wish to purchase your current home).  So that puts downward pressure on the valuation of your current home.

Hmmm.... are low interest rates a good thing?

2. Let's pretend that interest rates are now 8% and you get that $270,000 mortgage.  Three years later mortgage rates have dipped to 5%.  You want to move up into a bigger home.  Guess what?  You can get a much bigger home for the same mortgage payment, or you can purchase a similarly sized home for a much smaller monthly payment -- and buy that boat your always wanted.  The effect of the interest rate change on home values is upward pressure.  Cool!

There are certainly counter arguments to either of these points.  Low interest rates help to spur buying in the short term, which can help the value of your home during an economic downturn.  Also, when you're looking to buy, low interest rates may entice you to buy a larger and more expensive home (good for a seller right?).

I honestly don't know what this all means for the future of home values.  The current rates are obviously low and many experts predict they are only going to rise.  Not too long ago many jumped on the "rates are at all time lows" bandwagon but I think it is worth  a second thought before we cheer or jeer changes in interest rates.

Interest rates shouldn't be examined in a vacuum either.  Other factors affect home valuations:  1) population growth in the area, 2) unemployment, 3) location, 4) home inventory levels, 5) number of foreclosures, etc.  

When making your own assessment, consider how long you want to stay in a home you might buy.  Consider the stability of your job and your spouse's job. And think about how much joy you will derive from living in that new home. The value of quality of life is incalculable.