Interest rates tend to be very low when there are problems and desperations in the economy. The economy in the meantime has moved into higher gear. GDP is expanding robustly and jobs are coming around nicely. But the overall interest rates continue to remain low. In fact, the mortgage rates have been declining in the past month. Whatever the puzzling reasons, the current low rates are good news for homebuyers.
At the end of 2014, the average rate on a 30-year fixed rate mortgage was 3.87 percent. That is down from near 4.5 percent 12 months ago. Aside from the 18-month stretch in 2012 to mid-2013, there has never been a time since the Presidency of John F. Kennedy when the average mortgage rate fell below 4 percent.
Consider, the 30-year rate was above 10 percent throughout 1980s. Because of the high prevailing mortgage rates during this era, adjustable rate mortgages steadily became more popular even though they carried the potential risk to upward adjustment. For those few homebuyers in today’s market who view 30-year rates as being high, the one-year ARM is at the lowest point in modern times: 2.40 percent rate at the end of December.
A simple punching of the numbers into the mortgage calculators will show what happens to monthly payments at different interest rates. Since nearly all economists anticipate some rise in interest rates at some time this year, though, opinions differ on how much and how fast, it is worth reminding ourselves of the differences as shown in the table below on a $200,000 loan.
Even if a person misses out on the very low interest rates and catches something higher, they should take comfort in that it is still a good deal from a historical perspective. NAR’s housing affordability calculates that to buy a typical home, a typical home buyer, with a typical income after a 20 percent down payment would be shelling out a reasonable amount on mortgage and not too much. Homebuyers can also take comfort in the fact that the monthly mortgage payment will be fixed and unchanging while in 30 years, if using recent history as a guide, food prices would have more than doubled, gasoline prices tripled, rent payments nearly tripled, medical service quintupled, and college tuition outrageous (rising eight-fold from current cost).
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.