The state of interest rates

Written by
Peter Dunn

A lot can happen in 15 years. Especially when we are talking interest rates. In 2000 I kept my emergency savings in a money market account which was earning nearly 6 percent. I could have doubled my savings in 12 years. Around the same time, Mrs. Planner and I purchased our first home. We were 22 and got a mortgage of $106,000 with an 8 percent interest rate. At the time, neither of these interest rates was surprising. Mortgage rates had been well north of 8 percent in the preceding 3 decades and because of the higher loan rates financial institutions could justify higher money market interest rates.

15 years later the situation is pretty different.

"Today’s loan rates are obviously much different. Thirty year mortgage rates have fallen substantially, and have been held low by Federal Reserve policy and intervention. With today’s sub 4 percent mortgage rates, the 22 year old Pete the Planner with a $778 mortgage payment, could get a $164,000 house for what he paid on a monthly basis for his $106,000 home. In many ways, the interest rate decline of the mid to late 2000s are responsible for improving the economy and increasing the value of our homes. When more people can afford bigger mortgages, brought about by lower interest rates, then buyer demand causes housing prices to rise. It’s high school economics." (courtesy of the Indy Star)

It may be annoying how little you're earning on your savings account, but understand it's actually a good thing. If money market interest rates are low it typically means lending interest rates are low. And while I'm not a big fan of people borrowing money, increased lending stimulates the economy. So earning less on your money market account actual means good things are happening elsewhere in your financial life.

"What many people forget in regards to low interest rates is that the total amount of interest paid is substantially less than when there were high interest rates. It’s obvious, but so many people focus on the monthly payment, that they lose sight of the bigger picture. Lower interest rates equal lower payments, which also equal lower amounts of total interest paid over the life of the loan. My 8 percent interest rate in 2000 would have turned my $106,000 purchase into a $280,005 purchase. If I bought the same home today at a 3.92 percent rate, I would pay a total of $180,426. That’s nearly a $100,000 difference!" (courtesy of the Indy Star)

It's easy to be disgruntled about earning minimal interest on your money market account, but if you look at the big picture it's better than high mortgage interest rates.

Read my entire Indy Star column here.

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