OUR 16 1/2% MORTGAGE. Kids, to illustrate the effect that the double-digit inflation in 1979 to 1982 had on people’s lives, you should know that the mortgage that let us buy our first house started out with an interest rate of 16 1/2%. It had a lot of resemblances to the mortgages that have caused all the trouble in the last few years. It was a floating rate mortgage that was to be adjusted every six months depending on what a specified short-term interest rate was on a particular day. It started at 16 1/2%, but the rate could be adjusted up or down. And because our monthly payment was fixed, if the interest rate went up, there would be what was called “negative amortization.” Negative amortization meant that the amount we owed on the mortgage would increase. It was a risky mortgage to enter into, but it was all we could get, and I was confident that mortgage rates were going down as inflation went down. And that’s what happened. In the three weeks before the closing, the interest rate went down to 16%, and at the first revaluation after six months, it dropped to 12 %.
The mortgage rates were based on short term interest rates in, as I recall, May and November. Here is a table showing the annual inflation rate as it was reported each month during that period. Short term interest rates were lagging the inflation rate.