1981: the Past Shows Us a Good Present

 

For those of us who are complete nerds and sat on the edge of our seats to see if The Fed would decide to raise the overnight lending rate again in their most recent meeting, we were both let down and excited –no change, of course.  For those of us who aren’t quite so nerdy but do, in fact, care about what interest rates are doing and will be doing, I wanted to take this moment and interject a little . . . calm.  Let’s take a look at a handful of things, okay?

While interest rates today are creeping in the upper 4s to lower 5s, please remember that back in 1981 (yes, I realize many of you were not even born, but I’m not asking for a show of hands) interest rates peaked just over 18.5%.  Yes, you read that correctly –about FOUR TIMES the rate we’re dancing with at the mortgage disco today.

The average price of a new home back in 1981 was $83,000.  On a fixed-rate, 30-year mortgage for such a house, the principal and interest payment at 18.5% would be approximately $1,285/month.  (I went straight off $83K as my loan amount –I didn’t account for a down payment.) Using a handy-dandy app on my phone, I see that $1,285 in 1981 would be equal to approximately $3,485 today.  Using a 30-year fixed mortgage at an interest rate of 5%, anyone want to take a guess at the loan amount that $3,485 (principal and interest) in today’s dollars would get you? Anyone?  Bueller?  The correct answer is approximately $650,000.  Yes, you read that correctly, too.  Let’s look at all this from another direction.

Using that same nifty app on my phone, I see that $83,000 in 1981 is equal to approximately $225,000 in today’s money. That amount –$225,000 –isn’t going to buy you a mansion (or a moderately sized cardboard box on the beach), but it will certainly start you off in the right direction in building equity, not paying rent to pay someone else’s mortgage, and give you a nice tax deduction.  On a 30-year fixed mortgage at 5%, anyone want to guess what the principal and interest would be on a $225,000 loan? For anyone who said $1,208, you’re correct –big gold star on your forehead!

There are two takeaways from this little exercise:

  1. Rates ARE going to go up.  How high?  No one knows, but there’s A LOT of room between 5% and the 18.5% seen back in 1981. You can afford a lot more house these days –revel in that and relax!
  2. Because rates are primed to rise rather than fall, when you get the chance to lock the rate on a current mortgage, you’re usually better off to do it at that time than to “wait and see if it’ll come back down.” Like body weight, it goes up much easier than it comes down.

And remember, 1981 wasn’t ALL bad –it was the year that first gave us MTV, a cable channel that played actual music videos –we needed something to distract us from rising interest rates!

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