The yield on the 10-year Treasury has risen above 2.7%.  Mortgage rates are highly correlated with the 10-year yield, even though most mortgages are for a 30-year length.

If you want to purchase a house using a mortgage or refinance your existing mortgage, it is going to cost you more now than it did just a short while ago.  For a 15-year fixed rate, it will likely be above 4%, unless you are going to pay down the rate.

For a 30-year fixed, it will cost you close to a 5% interest rate.  It will likely be at or above 5% now for a refinance.

I was very fortunate to have refinanced a little over a year ago.  (Maybe a little bit of wisdom played into it, but a lot of it was just fortunate timing.)  I was going to refinance into a 20-year loan, but the rates were about the same as a 30-year loan.  I decided to shorten the length of the loan instead and went with a 15-year fixed mortgage at 2%.  It knocked off about 4 to 5 years from what I would have had if I hadn’t done anything.

My loan payment is actually slightly higher than what it was previously.  But I will have almost 5 years less of payments in the future.  If inflation keeps roaring, it may have been a mistake.  If inflation gets worse, I probably would have been better off refinancing into another 30-year loan.  In fact, it probably would have been better to do a cash-out refinance.  30 years down the line, the final payment may be the equivalent of the price of an average lunch.

But I don’t regret what I did.  The reason is because there is no guarantee that the high inflation (monetary and price) will continue.  Working towards a paid off mortgage is a form of diversification.  I have other investments that are geared towards hedging against inflation.

I am paying very little in interest costs.  Most of my payment for principal and interest is going towards the principal (i.e., paying down the loan amount).  It is a form of forced savings, and it is a form of wealth accumulation in a sense, even though housing is a consumer good.

If you are looking to buy a house right now, I recommend being extra careful.  I live in a hot housing market, and the prices are rising at an almost parabolic rate.  It is not that unlike 2005/ 2006 right now.

The problem is that people are going to run out of money to spend on housing.  I know that price inflation is raging, and it seems that people are flush with money.  But when you spend $70 to fill up your SUV and a dinner out with the kids costs you $100, it doesn’t leave you as much to pay for your housing costs.

The higher rates have made housing more expensive for most people without even factoring in the higher prices.

If you take out a 30-year fixed mortgage for $300,000, it will cost you $1,265 per month (principal and interest only) at a 3% rate.  At a 5% rate, that same loan amount will cost you $1,610.  (Of course, there are many other housing costs such as property taxes, insurance, repairs, maintenance, association fees, etc.)

Now imagine someone taking out a $600,000 loan, which something near that amount isn’t uncommon these days.  The recent increase in interest rates could mean a difference of $700 per month (every single month for the length of the loan).

Meanwhile, you have the Fed saying that it will continue to raise its target rate, and they are also talking about balance sheet reduction.  In other words, they are talking about deflating the money supply in order to get price inflation under control.

Now maybe it won’t last long.  But if the Fed’s tighter money stance doesn’t last long, it will be because we hit a recession.

In the short run, I think a bursting of the housing bubble is not unlikely.  I wasn’t saying this 4 years ago.  I think housing is part of the Everything Bubble that we are in.

If you are old enough, remember how fast things dried up in 2007 and 2008.  The housing bubble popped slowly at first, and then suddenly.  We are in a similar situation today where a lot of people have taken on higher debt payments than they should have.

For some people, it could actually be a good time to sell and rent.  It is an opportunity for many to put a good chunk of cash in the bank.  If we continue down a high inflation road, then this would be bad, but you can take your money and invest in other assets that will help protect you against inflation.

Rent is also high in many areas.  But if you can pocket a few hundred thousand dollars (if you purchased your house a while back), then this can pay for a lot of rent until things cool down.

There is no guarantee that the housing bubble will implode and provide a great opportunity for buyers.  But there is also no guarantee that prices will continue to go up, especially in the short run.

Higher mortgage rates and a tighter monetary policy from the Fed are major factors.  The Fed gave us the bubbles, and the Fed can take them away.  It is a very vulnerable market at this time.