In times of inflation, the value of your hard-earned money goes down over time, while the value of debt tends to go up as long as it’s fixed rate. This makes it incredibly important to understand the importance of fixed rate debt in times of inflation, and how it can keep you from losing money that would otherwise be better spent on investments or starting your own business or just enjoying life in general.
What is inflation?
If you’re thinking um, what? inflation is essentially an increase in prices. So, as inflation goes up, your purchasing power decreases. In other words, when you have money (say $1) today and there’s a 3% inflation rate it won’t buy you as much tomorrow because tomorrow $1 will be worth 97 cents. Keep reading to learn more about why fixed rate debt is important during times of inflation and how you can protect yourself from its effects.
How does inflation affect real estate prices?
Inflation is a steady increase in prices over time and has been a part of daily life since that first domesticated cow was traded for more grains. That said, inflation isn’t always high, nor is it always low. When interest rates are low, inflation tends to be moderate as well. Yet inflation can still cause serious damage to your portfolio if you don’t protect yourself by using fixed rate debt financing. So what do you need to know about how inflation affects real estate prices?
How does inflation affect your hard money loan payments?
The value of your hard money loan will not be affected by inflation. The interest rate on your hard money loan is fixed, meaning that you know exactly how much you will pay each month. If there is a significant amount of inflation over a period, you can rest assured that your interest rate on your hard money loan won’t increase. This flexibility has two key benefits: it saves you money, and it gives you greater peace of mind regarding payments and budgeting.
How can you protect yourself from rising interest rates?
If you’re worried about rising interest rates, you may be thinking about locking into a fixed rate loan. While it’s true that a fixed rate loan will protect you from higher interest rates, it isn’t necessarily cheaper than an adjustable-rate loan. There are many variables to consider when deciding on your financing plan; it will help to have someone who can work with you to make sure that no matter what happens, your purchase won’t get derailed by changing financial factors. A hard money lender can work with you to ensure that rising interest rates don’t have an impact on your ability to make monthly payments; they also offer short-term loans and other types of financing options so that you can tailor your financing plan for exactly what you need.
Should I refinance my loan?
While it may seem like a good idea to refinance your mortgage loan at a lower interest rate, that doesn’t always hold true during times of inflation. When money loses value over time, fixed-rate debt is beneficial because it prevents you from being outcompeted by inflation. For example, if you take out a $100,000 mortgage loan today with an interest rate of 6%, you’ll pay about $1,200 in annual interest for every year you keep that loan. If the cost of living goes up 10% next year and your salary stays stagnant (which is far from unrealistic), that means your cost of living has increased by about $10K.
Learn more at Capital Fund 1 today!