“In the days to come, even before the default date, people may see the value of their retirement accounts decline. They could see interest rates rise, which will ultimately increase their mortgage payments and auto payments. “
That was President Biden’s message at a press conference on the debt ceiling debate on Monday. The inability of Congress to agree to pay the country’s bills could soon affect your own bank account. And while it is true that defaulting on the country’s debt would be more or less catastrophic for the US economy, the president’s words may be a bit misleading as to how current mortgage holders would likely be affected. .
What is the debt ceiling?
Essentially, the debt ceiling is a limit on the government’s ability to pay the bills it has already racked up.
“Let’s say you’re about to buy a new flat panel TV with a credit card, but your purchase is declined because you’ve used up your entire line of credit. It’s akin to the “debt ceiling” – except it doesn’t work the same way for Congress, ”said Sarah Foster, Federal Reserve reporter for Bankrate. “Lawmakers can continue to incur new spending whether or not these new obligations exceed their limit. All of this means that the debt ceiling often ends up generating more economic uncertainty rather than dissuading lawmakers from spending more than they earn. “
It’s important to remember that the debt ceiling isn’t about new spending, it’s just a technical part of how the US government finances debt that’s already incurred.
And that’s the debate Congress is currently having, again: whether to pay the overdue bills. Failure to raise the debt ceiling would mean failing to pay those bills, which would challenge America’s economic prowess on the world stage.
What would defaulting on your mortgage mean?
President Biden’s comment gave the impression that rising interest rates would affect the number of homeowners who have to pay each month while they pay off their mortgage. And it’s true that a lower dollar and higher interest isn’t good for mortgage borrowers, but these effects won’t affect everyone the same.
“If the worst were to happen and a federal government default did occur, a likely impact would be for these rates to skyrocket, increasing the cost of future borrowing and home purchases,” said Mark Hamrick, chief of the office of Bankrate in Washington. “This is only one aspect of the likely crisis that would include damaging effects on the wider economy, such as loss of jobs. These disasters are said to be entirely “man-made” and must be avoided. “
What Hamrick points out here is essential: Higher rates will affect the cost of future borrowing and purchasing. Most standard home loans will not be affected. If you currently have a fixed rate mortgage, your payment will stay the same no matter what the market does. Partly for this reason, homeowners overwhelmingly prefer fixed rate loans: the monthly payment remains predictable, which makes budgeting easier.
This does not mean that the owners are completely unharmed, however. If you have a variable rate mortgage, your payments could increase as interest rates rise in the market. And the rise in interest also makes it less profitable for fixed rate borrowers to refinance their mortgages, which means you could end up with a higher interest loan and limited ability to leverage your equity. House.
And, anyone looking for a new mortgage on the purchase of a home would certainly have to pay more each month than a buyer with comparable principal on a loan opened today.
“In the extraordinary event that the counterproductive debt ceiling is not suspended or raised in the coming weeks, we are truly flirting with yet another financial crisis and another downturn,” Hamrick said. Such a slowdown could make home ownership precarious for many.
What else influences interest rates (or: why you should refi now)
Federal Reserve policy plays a huge, albeit indirect, role in going mortgage rates, and the Fed has signaled that it is preparing for a change that will eventually push those rates up.
Whether or not the debt ceiling is lifted, mortgage interest will almost certainly rise over the next few months, meaning the window to take advantage of historically low rates may soon close. The coming weeks could be your last chance to refinance your loan before today’s lowest rates disappear.