Home loan interest rates for the past decade: What changed?

Just like the stock market, the best time to take on a mortgage is when you are financially ready. Interest rates can go up and down due to many factors. Even if you somehow think that you can time it, your success as a reasonable mortgage payment will depend on your financial stability and paying capacity.

Today’s mortgage rates are affected by many factors. This article will examine some of them and how they have contributed to the current mortgage rates. We’re also going to look at how the 30-year fixed mortgage rates have changed over the past years.

Annual Percentage Rate

Before we compare rates according to the time frame, it’s essential to understand the difference between the interest rate and the annual percentage rate. When you compare lenders, the rate you are looking at might not include the entire loan amount you should consider.

As the term implies, the annual percentage rate (APR) includes more than just the interest you’ll be paying for your loan. Understandably, that automatically makes the APR more significant than the mortgage interest rate. This is true even for credit cards where the APR includes the total of the loan cost. There will be broker fees, admin fees, loan-processing fees included, and the like for mortgage APRs. While we will be discussing interest rates over the years in this article, do keep this difference in mind when you look up the rates offered by different lenders.

Due to the Truth in Lending Act, we are protected against lenders who do not disclose which fees are and aren’t included in the APR that they declare because the APR can be reflected to look like an interest rate. When choosing which lender to use, the different APR they offer can be an excellent place to start to inform your decision. It is best to find out what each APR includes when you compare.

Current Mortgage Rates

As of March 25, 2021, the average for 30-year fixed-rate mortgages in the country stands at 3.17, a far cry from the highest standard over the last 50 years, which stood at 18.53 on October 16, 1981. For reference, the Federal Home Loan Mortgage Corporation or Freddie Mac only started surveying lenders and mortgage rates in 1971.

Right now is not the wrong time to apply for a mortgage with the current economic climate. In the heels of the last election and the midst of the ongoing pandemic, 2021 is looking at record low-interest rates. If you have the liquidity and have the capacity to take on a home loan, there’s no better time to find a new house for a single-family. While the mortgage rate (and APR) are subject to change without notice, as long as the national economy is in recession, we can continue to expect today’s mortgage rates to stay attractive to borrowers.

Historical

There are many types of mortgages, depending on the loan’s guarantor, interest rate, and life. We can quickly compare rates for each period, focusing on 30-year fixed-rate mortgages. These are long-term loans that have steady mortgage rates over 30 years. A shorter-term loan can be a 15-year fixed-rate loan or even a 10-year fixed-rate loan. The opposite of fixed-rate mortgages is adjustable-rate mortgages (ARM). As it implies, ARMs are loans whose interest is adjusted based on the health of the market. Where fixed-rate mortgages protect you from increased cost, ARMs can give you a more justified loan rate based on the economy’s strength. (Later, we will discuss how you can manage your monthly mortgage by switching between these two loan types.)

During the last quarter of 1981, the U.S. was looking at the start of a recession which is not far from the situation we are currently facing. Throughout a lifetime, though, we can observe that the interest rate has improved for a long time. Twenty years ago, the 30-year fixed-rate loan average stood at 6.96, and then 4.76 just ten years ago, so we can still say that loan options are getting better every year.

In the recent past

In 2020, the Federal Reserve cut interest rates in a bid to stimulate the economy. It was a significant change that brought the interest rate nearer to zero. But this was not the first time during this period that the Fed made such a drastic decision, and it was not exclusively due to the COVID-19 pandemic. The economy has been slowing down for a while. In 2019, they also cut interest rates twice, the second time at a difference of 0.25 percent. Due to this, both short and long-term loan rates decreased. These are usually undertaken to encourage people to take more personal loans, invest in a new business, use their credit cards more, and increase their spending overall.

By 2020’s end, the 30-year mortgage rate dipped to its lowest in half a century when it closed at 2.67% on December 31.

Refinancing

To refinance or keep your current mortgage? That is the question.

At this point, you might be wondering if it only makes sense to choose to refinance your loan while living in our current times. But it depends.

Just like the decision to take a mortgage in the first place, the option to refinance a mortgage during a recession will depend on your financial situation. What may work for others might not necessarily work for you. Interest rates go down as the economy worsens, but other expenses also go up due to inflation. The cost of living can affect your capability in getting a refinanced loan.

To guide you in your decision-making, here are some questions you will need to ask yourself:

1 – How much more time is left with your loan?

Maybe you only have a 15-year fixed-rate loan, and you’re this close to calling your house altogether yours. In which case, we would recommend you see your original loan offer through. While you might save on your monthly payment with a lower interest rate, this doesn’t necessarily mean saving money. You are just lengthening the time left on your loan, which translates to a significant increase in its total cost. The difference can get as high as hundreds of thousands of dollars.

2 – How is my financial situation?

Consistently working on your monthly payments without missing any will give you a better credit score than when you first applied for the mortgage.  But your credit score is not the only factor that lenders will consider when you apply for refinancing. Your debt-to-income ratio (DTI) will also be studied.

Since your monthly payment will be deducted from your monthly income, the amount left over will be the only money left available to you. Whether you put it away as savings or using this money for other needs will not matter to the lender. The higher income went after you make your monthly payment, the better, reflected in your DTI ratio. Most lenders would prefer that you have a DTI ratio no higher than 43 percent, but some lenders do not approve DTIs more elevated than 36 percent.

3 – How is the national economic situation?

Finally, you also have to consider the current economic climate.

If mortgage rates are generally low and you have high liquidity, it might work in your favor to negotiate with your lender, especially if you have a fixed-rate mortgage. For example, you have a 15-year fixed-rate mortgage, which usually means paying a higher mortgage rate than a 30-year fixed-rate home loan. Since the purpose of a fixed interest rate is to protect you from unforeseen mortgage rate increases, you will be paying more than the actual value of your real estate. You’re losing out!

If you can convert your loan into an ARM, this means that you’ll be able to get a justifiable interest rate according to the current economic situation. A good strategy to do afterward is to apply again for a fixed interest rate ideally before the Federal Reserve starts increasing interest rates again.

Recap

If you are still confused, don’t worry because we are here to help.

As discussed, the following factors affect the average mortgage rates at any time: economic health, inflation, and interest rate cuts by the Federal Reserve. 

Right now, we are observing almost all-time lows for 30-year fixed mortgage rates. But if you go for other types of loans, like FHA loans and VA loans which the government backs, you might even be able to qualify for lower rates. Instead of the latest 30-year fixed-rate average of 3.17, you might even find rates as low as 2.25, depending on the lender.

Conclusion

Remember, though, if they say that what goes up must come down, what keeps going down will go up eventually. It’s a great time to examine your financial health and explore your loan options because right now is as best a time as any for a housing loan (before rates start increasing). If you’re already paying monthly for your mortgage, you can try the strategy we outlined, especially if you have a fixed-rate home loan.

On the other hand, if you are a potential homeowner and you feel that your credit score might not cut it just yet, don’t worry. You can always try applying for government-backed loans. A VA loan offers the best deal if you are a military service member. In general, applications for government-backed mortgages are not as stringent, and they are aimed towards the lower-income bracket.

Don’t miss out by paying for your house outright! You’ll only lock your money at a time when you can be investing it in yourself.