Will Raising the Debt Ceiling Raise Home Loan Rates?
Congress has found itself in another sticky situation that could raise home loan rates. Less than a month since the country was teetering on the edge of the ‘fiscal cliff,’ Congress now needs to raise the ‘debt ceiling’ beyond its current limit of $16.4 Trillion to avoid default on debt. The question on the minds of homeowners and home buyers is “Will raising the debt ceiling raise home loan rates and cost me more money in the long run?”
Despite the looming crisis over the debt ceiling, home loan rates continue to sit near historic lows, allowing families in Dallas and across the country to save money by refinancing or buying a new home. Apparently Congress has a little bit of a spending problem. The Congressional budget is set higher than the projected revenues nearly every year, leading to frequent debt ceiling increases. In fact, the debt ceiling has been raised 76 times since 1962, 11 of which have occurred since 2001.
Typically an increase to the debt ceiling is just another day in the office for Congress. A revised debt ceiling is proposed, approved by Congress and the President, thus allowing Congressional spending to continue as usual. However, when the House and Senate don’t agree on the current spending plan or increase of the debt ceiling, talk and fear of consequences begin to emerge.
What happens if the debt ceiling is not raised?
Failing to raise the debt ceiling would have many possible consequences. Essentially, Congress will run out of money at some point during the year and the Treasury will be responsible for deciding on which things to include in the budget:
- Elimination of military benefits
- Limitation of social security payments
- Failure to pay government contractors and agencies
- Default on national debt by not repaying bond holders
When weighing these options during a similar debt ceiling crisis in 2011, Fed Chief Ben Bernanke said “The United States would be forced into a position of defaulting on its debt. And the implications of that for our financial system, for our fiscal policy, for our economy would be catastrophic.”
A default on national debt would carry the greatest impact on costs for homeowners and prospective home buyers. For centuries the U.S. has been borrowing money from investors through sale of bonds, promising a dependable repayment and return. Any increased risk default on this type of national debt is likely to raise concerns and costs for the U.S. to borrow money.
Higher Risk Leads to Higher Rates
Whether a home loan, auto loan or credit card, when applying for credit, the creditor will be asking the question, “How much risk is there to receive repayment on the loan?” The higher the risk of repayment, the higher the interest rate to borrow the money. Investors in Bonds are no different. The more risky they feel it is to get their money back, the more interest they’re going to charge.
The U.S. is fortunate to issue what is considered a very low-risk bond. A safe haven for investors to park their funds despite a low rate of return. In recent years, countries like Greece, Italy, Ireland, Portugal and Spain also issued what was considered a “low-risk” bond.
That was until the countries spending problems and economic woes showed real signs of risk and default on their national debts. For investors and bond holders, the once “low-risk” investment was in jeopardy of default and no longer worth the low rate of return. The increased risk resulted in a fire sale of the bonds and a huge increase in interest rates and costs for those countries to borrow money.
Safe haven for borrowing money but how safe?
With the U.S. Congress facing further debate to raise the debt ceiling and avoid default on national debt, the path going forward looks eerily similar to those once “low-risk” bonds of Greece, Spain, etc. Issues like the ‘fiscal cliff’ and ‘debt ceiling’ continue to show how out of control spending can increase the risk of bonds and could likely lead to higher rates for bonds and even home loan rates.
A homeowner on the fence about refinancing, a current owner planning to sell a home and buy a new one, or a renter planning to buy a first home are each in a position to save lots of money at today’s current low rates. Waiting too much longer is likely to lead to higher costs and home loan rates. It’s time to create a plan of action and start taking the first steps or at least start becoming familiar with the process. We are happy to be a resource regardless of the stage in the process.
