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A Good Mortgage Rate Is Under 8% Historically Speaking

We have been enjoying historically low-interest rates for several years since the crash of 2008. In 2020 and 2021, mortgage interest rates fell to record lows. Because of COVID, the Federal Reserve's emergency actions helped push mortgage rates below 3% and kept them there.

Today in 2022, as the economy is trying to recover, mortgage interest rates are rising. The Federal Reserve has projected further tightening as they continue to intervene to get the money supply under control. That means interest rates will likely continue higher. The thirty-year rate briefly hit over 5% in April for the first time in a decade. If you're considering refinancing or buying a home, it might be wise to lock in a rate.

Historically, 30-year mortgage rates have averaged just under 8%. So even as today's rates inch past 5%, they are still a relatively good deal.

A Look Back For Perspective

Even with the recent rate increases, today's thirty-year mortgage rates are below average historically. Freddie Mac is the industry source for mortgage rates and has kept records for over 50 years. Between April 1971 and April 2022, the rate for a 30-year mortgage averaged 7.78%. So, today's rate, even at 5%, is still below the average.

In 1981, the mortgage rate was 16.63% on average. Rates reached an all-time high of 18.63% on October 9, 1981 – almost five times the 2019 annual rate. Here's some perspective:

  • At 16.63%, a $200,000 mortgage has a monthly cost of $2800 for principal and interest.
  • Compared with the historical average (7.78%), $2800 is an extra monthly cost of $1300 - $15,900 annually.
  • Just before the 2008 meltdown, rates sat at 6.03%. A $200,000 mortgage cost $1200 per month
  • By 2016, rates dropped to 3.65%. A $200,000 mortgage has a monthly cost of $915 in principal and interest.

In 2021 30-year mortgage rates plummeted as a result of the COVID pandemic. These record-low rates were a result of government policies to save the economy. Rates were never meant to sustain that level. The more world economies recover from the pandemic's economic effects, mortgage interest rates are likely to continue rising and approach their historical average.

The 2022 Rate Spike

In the first quarter of 2022, the rapid economic recovery and the Fed pulling back on stimulus programs caused rates to spike. According to Fannie Mae, the 30-year rate jumped from 3.76% to 5.11%. An increase of 1.35% in just eight weeks. Rates will likely continue to rise throughout the year as the Fed tightens. Where they'll peak is impossible to predict.

So, Is Buying A Home Still a Good Idea?

Even as interest rates creep up, it's important to remember that home loans are personalized to the buyer. Tracking mortgage rates can help you see trends, but not every buyer will benefit equally from today's rates.

Several factors are considered by lenders when you apply for a home loan. They include:

Credit Score – If your score is over 720, you'll have a better chance of securing a lower rate. Even if you have a sub-600 score, programs from the USDA, FHA, and VA loans are available. If you're planning on applying for a loan, it might be worth it to give yourself some time to improve your credit score. It could save you thousands of dollars over the life of your loan.

Down Payment – A higher down payment can lower your rate. Most mortgages, including FHA loans, require 3 or 3.5% down. Some loans like VA and USDA loans are available with a 0% down payment. If you make a 10 - 20% down payment, you might qualify for a conventional loan with low or no private mortgage insurance. This can reduce your monthly cost significantly!

Loan Type – The type of loan you receive will also affect your interest rate. However, this hinges on your credit score. For example, if your score is 580, you may only qualify for a government-backed loan like an FHA mortgage. FHA mortgages come with a lower interest rate but require mortgage insurance no matter how much you put down. Adjustable-rate mortgages typically offer lower introductory rates. However, those rates can change after an initial period.

Loan Term – While we have been focusing on the 30-year mortgage rate, with a 15-year mortgage, you would have a higher monthly payment, but they tend to have a lower interest rate. Even with a slightly higher monthly payment, a 15-year loan can save you thousands of dollars in interest throughout the life of the loan. For example, at 3% a $200,000 30-year loan would cost $103,000 in interest charges. A 15-year fixed would cost about $49,000 in interest.

Discount Points – You can purchase discount points to lower your interest rate. A discount point costs 1% of the home loan amount and reduces your interest rate by 0.25%. As an example, for a $200,000 loan, each discount point would cost $2000 upfront. However, the buyer recoups the investment over time thanks to the lower interest rate. Skip the discount points if you're planning on selling or refinancing within a few years.

The Bottom Line On Today's Mortgage Rates

For several decades, mortgage rates have been declining from their all-time highs. We have enjoyed historically low rates for over a decade, hitting a record low in 2021 due to the pandemic. Rates are on the rise but are still significantly below their historical average of 7.78%.

While it's a good idea to keep an eye on the daily rate changes in the market, if you are considering the purchase of a home and get a good mortgage rate quote today, don't hesitate to lock it in. With rates on the rise, if you can secure a 30-year mortgage rate below 5%, you're paying less than most American homebuyers throughout history! That's still a pretty good deal.

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