Do you hear talk of "historically low interest rates" and "best time to refinance in decades" but aren't sure how to put it all into perspective?
Fortunately, we did a little research and summarized what you need to know about today's mortgage rates, and more importantly, how these low rates affect refinancing or buying a home.
So read on for some facts on what to expect with rates in the future, what it means for today's real estate market, and a look-back on where rates have been in the past.
What the Future Holds for Interest Rates
If you're like most people, you probably look forward more than back. So you're likely wondering what the future holds in terms of interest rates.
As of February 28, 2013, interest rates for a 30-year fixed-rate mortgage were at 3.51 percent, according to Freddie Mac. The lowest they've hit historically was 3.38 in December 2012. So we can say that a rate of 3.51 percent isn't so shabby.
Wondering why are the rates so low nowadays? Duffy says that recent moves by the Federal Reserve have held interest rates in check. The government has been artificially suppressing interest rates by essentially buying mortgage loans from the banks - thereby freeing up more money for lenders to then give to borrowers. However, he says government involvement will not last forever, and the rates will start to climb.
In fact, Duffy predicts that "[For] most of 2013, we'll see relatively low interest rates. Maybe not as low as we have today, but certainly in the four percent range, give or take a quarter point."
To see how Duffy's predictions measure up against other rate forecasts out there, we checked the mortgage interest rate projections made by the Mortgage Bankers Association (MBA), the national organization representing the real estate finance industry. And their predictions size up to Duffy's.
According to the MBA, by the end of 2013, the interest rate on a 30-year fixed mortgage will be at 4.4 percent. And by the end of 2014, they see the rate at 4.6 percent.
That doesn't sound like much, you might say, but if you're financing hundreds of thousands of dollars over 30 years, that interest can really add up. For instance, on a $400,000 fixed-rate mortgage, a mere two-tenths of a percent (the difference between an interest rate of 4.0 and 4.2 percent, for example) costs you an extra $16,400 over the life of the loan.
The Effect of Low Interest Rates
With rates at all-time lows, Duffy says there has been an increase in refinancing and home buying.
"There has been a lot of refinancing. In fact, I've had a few clients who have refinanced a couple times over. When rates went from the fives to the fours, they refinanced, and when rates went from the fours to the low threes they refinanced again. It's making their cost of homeownership that much lower," says Duffy.
What's more, the National Association of Realtors' Housing Affordability Index hit an all-time high in the first quarter of 2012, which means that home ownership was at its most affordable since they began the index in 1970. The index is a number based on the relationship between median family income, median home price, and the average mortgage interest rate.
"In addition to a lot of refinancing, I'm seeing an uptick in new homebuyers. I think the confidence is coming back for buying homes. And based on the index number alone, it's a great time to buy," Duffy says.
A Historical Look at Interest Rates
So we now know that interest rates are still at historical lows. But haven't they been that way for a long time? Not really. Consider the fact that the average interest rate on a 30-year fixed-rate mortgage just two years ago - for the month of January 2011 - was 5.005 percent, according to Informa, a leading financial industry information provider.
For the same loan in October of 1981, the average interest rate was 18.45 percent, according to information from the Federal Reserve System, which oversees national monetary policy.
No, that was not a typo: 18.45 percent. So how does today's 3.5 percent rate look now?
"These rates right now are just phenomenal. I mean who would ever think you could get a 15-year rate in the high two's or a 30-year rate in the three's? When I first bought my house in 1979 it was 16.75 percent," says Don Frommeyer, president of the National Association of Mortgage Brokers (NAMB), the nation's sole trade organization of mortgage professionals.
As you can see, interest rates have definitely shifted throughout the years.
So, just for fun, let's evaluate the difference between the cost of borrowing money today, opposed to in 1981, shall we? We'll compare a 30-year, $300,000 fixed-rate mortgage with a 1981 rate of 18.45 percent to one with a February 2013 rate of 3.51.*
|1981 Mortgage||2013 Mortgage|
|Interest Rate:||18.45 percent||3.51 percent|
|Interest Over Life of Loan:||$1,367,362.81||$185,571.33|
Again, those are not typos. The interest on a $300,000 mortgage in 1981 would be over one million dollars - in fact, $1,181,791.48 more than today's loan. And the monthly payment? Almost four times as much. Makes you wonder why we didn't all just live in caves back then.
*According to the "Weekly Primary Mortgage Market Survey®" by Freddie Mac, an institution established by Congress in 1970 to provide affordability to the nation's residential mortgage markets, as of February 28, 2013, the interest rate on a 30-year fixed-rate mortgage was 3.51 percent while the interest rate for a 15-year fixed-rate mortgage stood at 2.76 percent.