Ignore The Debt and Pay The Price…With Interest

What would you do if the monthly payment on your home mortgage jumped from $1,100 a month one year to over $1,400 the next? Keep this in mind when you hear prominent economists and opinion makers talk about higher interest rates as a consequence of our $13 trillion debt.

If we continue to accumulate debt, those who lend us money—both American investors, as well as foreign countries like China and Saudi Arabia—will demand higher interest rates to compensate for the greater risk of loaning money to the US.

But don’t be fooled into thinking that higher interest rates only affect power-players in New York City and Washington, DC. Anyone that holds a home mortgage, a student loan, or even a small credit card balance will be affected by this, because the size of your monthly payments is directly impacted by the interest rate.

Here’s how: Imagine you’re purchasing your first home with a mortgage for $200,000. Your interest rate is 5 percent this year, but it adjusts upward after the first few years. That 5 percent interest rate is “indexed,” often to the interest rate on Treasury securities – the federal government’s debt. This means that the interest rate on your mortgage rises and falls with the interest rate on government bonds.

At 5 percent interest, your mortgage payment is reasonable — just under $1,100 a month.

However, while you’re enjoying that new house, Congress is spending its way to an additional $1.4 trillion in debt. That’s on top of the $13 trillion we already owe. When our lenders demand higher interest rates in response, and the rate on your mortgage jumps to 8 percent, your future payments would look a lot different.

At 8 percent, your payments would increase by $330; if the rate jumps again, to 12 percent, you’d be paying an additional $560 (Think that’s impossible? Remember – in 1981, the yearly interest on a fixed rate 30-year mortgage was over 18 percent!)

Not only will the payments go through the roof, but over the life of the loan—let’s say 30 years—the total cost of your $200,000 house at a steady 5% is about $386,000. That’s not chump change – but on a mortgage where the rate rises to 10% you’d be paying $541,000. That’s $155,000 more – almost enough to buy another house!

Keep this in mind the next time you see a debt clock that features your share of the national debt. The debt is very real, and the consequences of doing nothing – like higher interest rates – will have an impact on all us.

Image courtesy of swisscan.

Read the original story at Defeat the Debt