As Congress continues to dither about whether or not to raise the debt ceiling, lots of people, including the President of the United States are predicting pretty much a collapse of the economy.  Others say that it will indeed, be very, very bad but that we would somehow muddle through with somewhat diminished status in the world.

Almost certainly interest rates would go up.  On mortgages, on credit cards, on car loans and student loans, everything.

Mortgage rates have already edged up about a ¼% from a week ago.  Now, that doesn’t seem like much but as mortgage interest rates continue to climb, homes become less affordable to people who want to buy them.  The payment on a mortgage for a $300,000 home at $4.25% is lower than the same mortgage on the same $300,000 house at 5% or higher.  When mortgage companies – already very risk averse – are determining if they want to lend someone some money, they want to make damn sure they can pay it back.

If the monthly mortgage payment gets too high as result of increased mortgage interest rates, the loan is likely to be turned down.

No mortgage. No home sale.

The most effective way to counteract rising mortgage interest rates is by lowering the price of the house.  This might be a possibility for some people but for many others it will mean the difference between being able to sell their home and being “underwater” with their mortgage and being unable to sell their home.

What Is The Worst Case Scenario?

Let’s be honest, though.  Currently, mortgage interest rates are at historical lows. That means that at no other time in history, factoring for inflation, have interest rates for mortgages been in the mid-4s. There are even some large mortgage companies that are advertising 5 year ARMs (Adjustable Rate Mortgages) in the 3s.  Now, that’s low.

Suppose, the world went to hell in a hand basket and, as most economists and pundits are forecasting, mortgage interest rates go up.  What I’ve heard is that they may go up by a full percentage point. Holy moly!  That would put mortgage interest rates in the 5s.  Is that so bad?

I refinanced a couple of years ago to switch from an ARM to a 30-year fixed rate mortgage (my wife is very risk averse) and the good, good rate I got then was 5.375%. Huh?  In the late 90s, I bought my very first home – a condo – and my fantastic rate at that time was 7%.  Whoaaaa!

Guess what?  People still were buying and selling houses.  To be sure, the prices of houses were different.  There wasn’t the massive number of homes that are in short sale or foreclosure status.  Still. it wasn’t the end of the world.

The Housing Recovery Hasn’t Started

Having said, all that, it is still lots better if Congress would just quit their squabbling and posturing and chest beating.  They should raise the debt limit in order to keep the economy from collapsing.  The “full faith and credit of the United States” should mean something and it won’t if we default.

This crazy circus side show of a dysfunctional political system is making a spectacle of us and our economic system.  If the people in Congress really want to represent us, they should do everything they can to encourage the recovery, increase jobs, and loosen mortgage credit standards so people will have a nice place to live in which they have  a stake.

Don’t let the politicians scare you.  Click Here to begin looking for a nice home!