The Cost of Money

The prevailing interest rate is often referred to as the "cost of money."  Or more simply put the amount that you have to pay to use someone else's money.  Typically long tern money (30 year mortgages) is more expensive then short term (10 or 15 year mortgages) money.  Another way of looking at this is as an investor.  If you were to put your money into a CD you would expect a larger return on your money (interest rate) if you put it into a 10 year CD than a 2 year CD.   

As a real estate professional I try to stay on top of what interest rates are and what they are expected to do.  Recently I got an email from a Mortgage Broker friend from Farmers State Bank.  This email gave me the current rates.  I will not post the rates here as they change so frequently that they are probably already out of date.  What I did notice is that the long term money is cheaper then the short term money.  The 20 year mortgage was 6.5 and the 30 year mortgage was 6.125.  This is a quite rare phenomenon in economics known as an Inverse Yield-Curve. 

So what!!!  You might say.

Well...  If you had an ARM (Adjustable Rate Mortgage) your interest rate is adjusted based on short term money.  If those rates are going up but the long term money stays low then it might be time to trade in your ARM for a fixed rate.  As an investor why would you want to tie up your money for a long term for a return that is less then if you tied up your money for a short period of time?  The simple answer is uncertainty.  They want to get their money tied up to avoid a possible downturn in the economy, even if it is at a discounted rate. 

Learn more about Inverse Yield-Curves at Investopedia.

Comment Notification

Subscribe to this post's comments using RSS