Where, Oh Where Did High Interest Rates Go?
Where are those rising interest rates we keep hearing about? Over the last eight years of slow but steady recovery, average interest rates on 30-year fixed mortgages have gone through periodic 2-3 month spikes of between 0.75 and 1.25 percentage points, only to fall back in a slow decline. Stimulus from the Federal Reserve created this situation, and now the Fed is having trouble returning rates to levels that are more typical without creating economic turbulence.
As of this writing, average interest rates on 30-year fixed mortgages had fallen to 3.89%, the lowest value since the middle of November 2016. There's little reason to suggest a marked increase in the near future.
Rates may be low, but consumers are not taking advantage. Supply and demand issues are partly to blame for both home buying and refinancing slowdowns, but for different reasons. Interest rates have been historically low for so long that most people who qualify for refinancing have already done so. On the sales side, home supply shortages in areas of the market have led to rising prices, putting home buying out of reach for many lower income Americans.
Over the past week, data from the Mortgage Bankers Association (MBA) showed that total mortgage application volume rose by only 0.1% over the previous week, with an almost 22% decrease in volume from the previous year. Refinancing applications are down 40% from the previous year's total – not surprising, since rates were 3.43% back then.
Should you act now before interest rates eventually creep up toward 5%? Eventually, if the Federal Reserve follows through with their plans, rates must start approaching 5% – but you likely have time to plan a strategy before that occurs.
A Little Perspective
If you consider 5% interest rates as "high," a little perspective is in order. Data from the St. Louis Federal Reserve shows that from the time the Fed began tracking average 30-year fixed mortgage rates in April 1971 until April of 2009, the rate never dropped below 5%. Afterward, the rate has been below 5% except for brief stints from 2009-2011.
The average from April 1971 to the present is over 7%, while the average 30-year mortgage interest rate hasn't topped 4.5% since January of 2014. Be glad you weren't buying a home in the early 1980s, when the average peaked at 18.63% in October 1981.
Still, every little bit counts when it comes to interest paid on a 15- or 30-year mortgage. Use an online calculator to scenario test buying your dream home at today's rate, and then run it again at both 4.25% and 5% interest rates. You'll be amazed by how much more you would pay each month and over the life of the loan.
Can You Take Advantage?
So, interest rates remain historically low. What good is that if you are priced out of the market? You need an achievable target price for a home, and a plan to get there.
Start by realistically assessing your financial situation, and setting a timeframe. Do you plan to be in a home within a year? Five years? From there, you can make interest rate and home price assumptions that give you an idea of the necessary down payment.
Set a budget that controls spending enough to save for a suitable down payment. By doing so, you'll establish the habits necessary to afford the monthly payment as well.
If you don't plan to be in your new home for long, or you are willing to gamble that interest rates stay low for 5-7 more years, consider an adjustable-rate mortgage (ARM) to lower your monthly payments – but change your spending habits to match the future interest rate adjustment period. You will be able to absorb the larger monthly payment when it arrives and will have developed the habit of saving in the meantime.
Are you already satisfied with your home? In that case, periodically check interest rate offers at your credit level to determine if the lower interest rates of a refi can cover the loan costs and still provide savings. Online calculators can assist here as well.
We can almost hear fathers across America saying, "You kids have it so lucky these days. Why, when I was your age I had to pay 20% interest on my mortgage! And I was darned lucky to have it!"
Once again, Dad may be exaggerating but he is basically right. In historical terms, interest rates remain near rock bottom, and they aren't likely to fall much further. Therefore, it's a great time to explore your housing options.
Given the rise in home prices, consider pre-qualifying for a mortgage in your desired price range and shop with the confidence to take advantage of a great deal when you find one. Install a proper budget to achieve a better position for future deals.
If you already own your home, short-term dips in interest rates are the perfect time to investigate refinancing options. Since so many homeowners have already taken advantage of seven years of low rates, the refi market is hungry for new business. Deals should be available.
Take advantage of low interest rates now. You have 30 years or so to find some other topic to show your children and grandchildren how difficult it was back in the 2010s.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.