Historical Guide to Mortgage Rates and What Moves Them

When you read through this historical guide to mortgage rates, you’ll notice something significant: today’s 30-year fixed-rate mortgage rate is low. These lower rates mean homes are more sellable and mortgages more affordable. 

Current mortgage interest rates remain lower than ever. In the last fifty years, homeownership has never been so affordable.  

A Quick Historical Guide to Mortgage Rates

Thirty-year fixed loans have hit record highs and lows since 1971, according to Freddie Mac’s Primary Mortgage Market Survey (PMMS).

Freddie Mac began surveying lenders in 1971 and reported the 30-year fixed-rate mortgages bounced back and forth within the 7.29% to 7.73% range at that time. 1974 saw annual inflation begin to rise, an increase that would continue through 1981 when it reached 9.5%. To keep up with inflation, lenders increased mortgage rates, and borrowers experienced previously unknown market volatility.

The Federal Reserve increased the federal funds rate — the overnight rate banks charge each other — to combat the rising inflation rate. 

While continuing federal funds rates drove the 30-year fixed mortgage rate to a 1981 record high of 18.63%, the Federal Reserve’s efforts eventually paid off with normal inflation levels recorded in 1982. Home mortgage rates hovered within single-digits for most of the subsequent two decades.

Mortgage rates kept falling until they hit the lowest recorded mortgage rate — 3.12% in November 2012. 

When the Federal Reserve announced it had plans to reduce the number of bonds it purchased, it triggered a bond market panic that in turn saw mortgage rates jump to 4.17% in 2014. But that fell to 3.85% during the following year. 

The second half of the decade saw investors flock to the U.S. bond market and rates began to rise following the 2016 election. Rates reached their peak of 5.34% as 2019 began. Fixed-rate mortgages continued to drop during 2019 with an average rate of 3.7%. 

And then the COVID-19 pandemic happened.

In response to COVID-19 in the U.S., the Federal Reserve triggered both long and short terms rates to drop when they lowered the federal funds rate to between 0 – 0.25%. They hoped the lower rates would encourage borrowers to consider new home loans and other loan products. Freddie Mac reported a 30-year fixed-rate mortgage of 3.6% in June of last year.

How Your Home Purchase Is Affected By Historical Mortgage Rates

Lower interest rates mean borrowers have to pay less interest. Less interest means a smaller monthly mortgage payment, often encouraging borrowers to take the leap and apply for a mortgage. 

While mortgage lenders decide how much money you can borrow, by looking at your income and your debts, lower monthly payments can often help potential borrowers afford a house they might otherwise not be able to afford. Alternatively, it can also mean borrowers might be eligible for a larger mortgage translating into a bigger house or “more house” for the money. 

The Consumer Financial Protection Bureau (CFPB) has set out guidance to help potential borrowers keep their total debt at a manageable level. They recommend spending a maximum of 43% of your gross income on all your debt combined–credit card or consumer debt, mortgage, loans, etc. This is what’s called the debt-to-income ratio (DTI), and it’s one of the significant factors that lenders take into consideration when you apply for a mortgage, a refinance loan, or any other type of loan product.

Other Factors That Can Impact Your Interest Rate

Every person’s situation is unique; that’s why mortgages are personalized based on each borrower’s finances. Mortgage interest rates are an excellent place to start, but they aren’t the only thing that determines how much you’ll wind up paying each month. Other factors within your control can also impact how much you’ll have to pay in interest. Key factors that can affect mortgage interest include: 

How much do you have available to use as a down payment? 

The more money you have as a downpayment, the better your interest rate will be. While most mortgages require borrowers to have a minimum of 3% of the house purchase price for a downpayment, putting 10% or 15% can drop your interest rate considerably. If you can put 20% down, you’ll not only get a better interest rate, but you’ll also avoid having to pay mortgage insurance, thereby lowering your monthly mortgage amount even further. 

Is your credit history good? What is your credit score? 

Your credit history and credit score will play a role in how much interest you’ll have to pay. A 620 minimum credit score will begin to get you lower interest rate loans. With a lower credit score, you can still find reasonable interest rates, often through loans such as the FHA and VA loan programs.

To put yourself in the best position, as soon as you know you want to purchase a house, work on getting your credit score as healthy as possible. It could save you thousands of dollars over the lifetime of your mortgage. 

How much do you want to borrow?

Smaller mortgages, typically sub-$75,000, tend to have interest rates higher than the national average. These smaller loans don’t earn as much for the lender, so higher rates help lenders recoup their costs and generate a profit. 

On the opposite end of the scale, huge mortgages also tend to have higher than average rates because of the increased risk of lenders’ loss. The best rates accompany homes of the average value for your part of the country.

Next Steps

Do you have questions about your finances and whether buying a home is in your future? This is the perfect time to connect with a professional mortgage loan officer who can provide you with valuable information, tailor-made for your specific financial situation. To get in touch, call us or fill out our online application. We’ll set up an appointment time that’s right for you to talk through some possibilities.

Photo by Andrea Piacquadio from Pexels