John Colby

Posted by John Colby on 8/27/2017

Stronger economic indicators can lead to more jobs, higher wages and house building expansion. A stronger economy can also lead to interest rate spikes. Inflation is another change to watch for as the economy strengthens.

Economic growth could cause your mortgage payments to balloon

Both rising interest rates and inflation can have an impact on your monthly mortgage payments. Inflation's impact on mortgages may be second hand, especially considering that inflation is generally caused by an increase in consumer spending.

Inflation is created when consumer demand outpaces supply. To offset the difference, retailers might increase the costs of goods. As the cost of goods rises, consumers may have less disposable income to turn to in order to pay their bills, including their mortgage.

Another element that can cause prices to rise is the cost of items like fuel and technology. For example, rising fuel costs can cause public transportation and shipping costs to go up. When this happens, prices on material goods may spike.

Dance between interest rates and residential mortgages

Interest rates have a more direct impact on mortgages. First time home buyers may have no choice but to pay higher monthly mortgages if interest rates go up. Because rising interest rates are generally viewed as favorable by lenders, rising interest rates could also spell larger opportunities for home shoppers to secure a mortgage.

Additionally, interest rates can significantly impact monthly mortgage levels for homeowners with an adjustable rate mortgage. It was this upward shift that had a negative impact on people who bought an owned houses just prior to the kickoff of the Great Recession. Anyone who has experienced an increase in her credit card interest rates knows how much rising interest rates can impact a monthly expense.

This is one of the downsides of rising interest rates for homeowners. Not only might homeowners see their monthly mortgage rise after interest rates go up, homeowners also might see their credit card bills go up.

Fortunately, there are steps that homeowners could take to offset both inflation and rising interest rates. Signing a low to moderate fixed mortgage is a good first start, if interest rates on the fixed mortgage are at competitive levels. That way, should interest rates rise, homeowners won't have to worry that their monthly mortgages will loom larger. They can also manage a more stable budget and better know where they stand financially should an unexpected event like a medical issue or a house repair arise.

Building cash reserves is another way that homeowners can offset inflation and rising interest rates. To take the jolt out of building cash reserves, homeowners can start small. For example, homeowners could start by depositing a quarter of their income tax returns into a separate, interest bearing account.

They could also use bonus checks and a portion of their commissions (for homeowners who work in sales) as cash reserves. The point is to keep building the savings. Eventually, the cash reserves might be used to purchase a new house or to make upgrades at a current home.

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