Interest is the relative price of present vs. future assets.
The higher the interest rates, the more future assets cost in
terms of present assets.
When you take out a loan you are buying present assets by
paying future assets, and the lower the interest rate the
better for you. Once you have taken out a fixed rate loan,
however, you hold present assets and owe future assets,
and it seems you should prefer higher interest rates. Thus
when interest rates rise that should be good news for you,
and when interest rates fall that should be bad news.
So why do homeowners act like falling rates are good news,
and why are they so much more eager to refinance loans when
rates fall rather than when rates rise? Am I missing something?
For example, if you borrowed $100,000 at 7% interest, owing
$7000 per year forever, and then interest rates rose to 10%,
then you should be able to get someone else to take over your
$7000 per year obligation for only $70,000. So you should
be able to refinance, make the same loan payment, and have
$30,000 more equity in your house.
Robin Hanson [EMAIL PROTECTED] http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323
