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What A Debt Default Could Mean For Your Mortgage

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MINNEAPOLIS (WCCO) — If a deal is not reached over raising the federal debt ceiling, the real estate market would be put in an especially tough position.

WCCO-TV met with a mortgage consultant to see how Minnesotans pocket books’ could potentially be affected.

According to Ben Coulter, mortgage consultant with Metropolitan Financial Mortgage Company in Edina, both first time home buyers and those who have an adjustable mortgage rate could take a real hit.

Coulter said it comes down to the purchasing power of the buyer. Bottom line, with a big hike in interest rates, buyers are forced to cut back.

Think Economics 101: Bad credit means high interest rates, while good credit gets you the best rates.

“So, essentially, the U.S. right now has great credit, gets the best rates in the world. But if we default, or if the debt ceiling isn’t raised, then we’re going to go back down,” said Coulter. “We’re going to be paying more on credit cards and auto loans and you name it.”

Topping that list is your mortgage rate. Right now, Americans are paying around a 4.25 percent mortgage rate, but if America defaults on debt for the first time in history, things could change overnight.

“Going forward, worst case scenario, a lot of the things that we’ve been seeing and reading are anywhere from a half percent to three percent [interest hikes],” Coulter said.

Perhaps it’s easier to understand with a hypothetical:

In Minnesota’s Sixth District, where the median home value is around $240,000, a 3 percent hike in interest would ultimately mean a $400 increase per year in loan payments. That adds up to $20,000 over a lifetime.

Coulter said the fear of skyrocketing interest rates is very real to several of his clients.

“I’ve got a few people right now refinancing and want to get locked, want to make sure they get this taken care of before anything that happens with debt ceiling,” Coulter said.

He said he assures his clients, however, that he’s confident a deal will be reached.

“I expect that Congress is going to get this thing passed and we’re not going to have to deal with this nightmare that could happen,” Coulter said.

The easiest way the expert says he can explain it: If the U.S. credit rating is downgraded, then people don’t want to purchase our debt. As a result, the U.S. has no choice but to increase interest rates.

The impact of no deal reached would go beyond just mortgages. Americans could also see a dipping dollar, delayed social security payments and potentially sharp drops in the stock market.

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