Mortgage Interest Rates: Then, Now and Tomorrow
When it comes to purchasing a home, whether it’s your first or your tenth, few people are in a position to pay cash. Most of us need to rely on a mortgage, and of course securing the best interest rate possible is a goal we all have when we take out any type of loan.
Events That Have Influenced Mortgage Interest Rates
Dating back to about 1910, rates had been fairly consistent at 5%, although mortgages were not very common. That changed with the growth of the 1920s. At the beginning of the Great Depression, mortgage interest rates had risen to around 6%. With the collapse of the economy and the hardships faced by many Americans, mortgage interest rates decreased as the decade progressed and fewer and fewer people could afford to take out a mortgage. Instruments put in place by the federal government helped establish fixed rate mortgages as the new norm.
World War II was the next major influence on mortgage interest rates. With most of the country’s men off to fight the war, there was less demand for consumer goods, including housing, and a shortage of materials to build them. This encouraged lenders to let the mortgage interest rate drop below 5% for the first time. Following the war, returning soldiers and their families were again in the market for new homes. Many took advantage of the VA loans but the demand for mortgages overall escalated and with the rising demand, so did the interest rates for the next few decades.
The Arab oil embargo of 1973 plunged the country into a recession. Rates leapt from around 6% at the beginning of the decade to 8% and 9% halfway through the decade. Inflation was rampant and rates continued to soar, passing 10% by 1980. During the early 1980s, mortgage interest rates reached an all-time high of nearly 17%, a rate which has not been seen since. A change in policies and a slow recovery helped alleviate the mortgage rate climb. As the decade progressed, the country bounced back and the interest rates reflected that. By the end of the decade, they were back under 10% and aside from a few spikes continued to fall into the 2010s.
Affordability of Current Interest Rates
Mortgage interest rates can and often do change on a daily basis. Shopping for and locking in a good interest rate is one of the most critical aspects of choosing a mortgage. Today’s interest rates are among the lowest the country has ever enjoyed. In the last 60 days, the average 30-year mortgage has had an interest rate of between 4.24% on April 5, 2017 and 4.09% as of May 31, 2017 according to Bankrate.
Interest Rates in the Foreseeable Future
As you can see, interest rates are currently at a very low point, making this an ideal time to make the dream of owning a home a reality. However, a number of industry insiders are projecting that rates will inch upward as the year progresses. Though the increases look to be relatively small, any increase will hit you in the wallet and may even impact your ability to get approved for the mortgage.
Money quotes the Mortgage Bankers Association as making the projection that 30-year fixed rate mortgage loans, which are currently at about 4.2%, will increase by the end of the year by as much as a half of a point. The 15-year mortgages are also expected to increase, though slightly less and adjustable rate mortgages (ARM) could see an increase of roughly .7 % before 2018 arrives.
So what does that mean for you?
Variations of a quarter to a half of a point can have considerable impact on the amount of your monthly payment as well as on the total amount of interest you pay over the lifetime of the loan. The amount can be in the thousands of dollars. As an example, a 30-year mortgage with an interest rate of 4.17% and a monthly mortgage payment of $1,218.17 could see a monthly increase of $78.43 if the rate increased to just 4.7% as projected. This could cost you as much as an additional $28,000 in interest. For those considering an ARM, a starting interest rate of 3.21 could cost you an additional $96.64 per month if the rate jumps to 3.9%. Depending on the length of the loan, that could add up quickly.
Tips for Getting an Affordable Mortgage Interest Rate
As nothing is etched in stone, locking in today’s rates is probably in your best interest. There are a few things you may be able to do that can tip the interest scales in your favor.
- The Size of the Down Payment – Standard practice for down payments is 20% of the purchase price of the property. Anything less elevates your risk factor to the lender and they compensate for that by increasing the interest rate, among other things. Having 20% to put down on the purchase will get you the best rate the lender has to offer.
- Cash Reserves – In addition to your down payment, lenders like to see at least two months’ worth of the mortgage payments available in cash as an emergency backup. This can be in your checking, savings, certificate of deposit or money market account.
- Shop Around – There are numerous websites that offer comparisons of mortgage interest rates amongst the most prominent lenders. You can also check local lenders as they sometimes offer good deals to local customers that aren’t available on the web.
With mortgage interest rates being as low as they are right now, this is the arguably one of the best times in American history to purchase a new home. Rates haven’t been this low in nearly 100 years and if the past has shown us anything, it is that nothing stays the same forever. A wise shopper would take advantage of these affordable rates while they can.