Interest Rate Appreciation Day

Let's take a few minutes today for a little interest rate appreciation, shall we? I should have done so myself several years ago, when I bought my first home and was able to secure a low interest rate. I knew it was a low rate. I knew that rates had been (and still are) near the low end of the historical spectrum. I knew then and know today that rates in the past have been very high at times, even reaching into the teens.

But I never thought about what that really means, until recently. It happened the other day. I was reading some comments on the subprime housing mess on a website somewhere, and someone had noted that back in the early '80s, he had gotten a mortgage with an interest rate of 14.5%. After my eyeballs returned to their usual size and returned to their sockets, I dug out a mortgage rate calculator and did a little number-running.

I posed this hypothetical scenario: I was buying a $200,000 home with 20% down. So I would need to borrow $160,000. I wanted a fixed-rate 30-year mortgage. I figured this was close to a typical homebuyer's situation. First, I entered 6.5% as the interest rate on the mortgage -- that's a rate many can get today and it's close to what I got four years ago. Presto -- the monthly mortgage payment amount? $1,011. (This excludes taxes and home insurance, of course.) That seemed reasonable.

It was now time to change the interest rate -- to see just how different the situation would be with a steeper interest rate. I plugged in 14.5% as the interest rate and ... the new monthly mortgage payment was: $1,959!

That's a difference of $948, almost doubling the 6.5% payment amount. Talk about sobering. If that had been me four years ago, I simply wouldn't have been able to buy that home. What would I have been able to buy, with a $1,011 monthly payment and a 14.5% interest rate? A $103,000 home.

I tried to envision what I could buy in my town for that amount. All of a sudden, my garage disappeared, as did two of my bedrooms. Bye-bye to air conditioning and hardwood floors. Hello, one-bedroom, one-bath, 650-square-foot cottage. Could this picture get any worse? Well, yes -- in the very early 1980s, mortgage rates soared above 18%.

The upside
Given such a buyer-unfriendly interest rate environment, I can imagine that I might have just not bought a home. Fortunately, there's a bit of an upside here, and let me tell you about it, in case you're hyperventilating into a paper bag right now. When interest rates are that high, they're high not only for mortgages but also for bank accounts and other interest-paying investments. So while you may not end up buying a home that appreciates in value for you, you could instead put that down-payment money into other investments, at least for a little while.

If you're facing a steep interest rate environment, you might, for example, be able to earn 12% to 15% in CDs or in your savings account. You might also do well investing in bonds. If rates then fall, as they did during most of the 1980s and 1990s, you'll look like a genius.

When rates fall from high levels, stocks can explode in value. Check out how these companies did between 1980 -- when much higher rates prevailed -- and the lower-rate environment of 1990:

Learn more
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