Friday, 9 November 2018
Once you're in the market for a home, you'll probably be bombarded with messages about mortgage rates: “Lowest they've ever been!" or “Lock in before rates go up!"
If it seems like rates go up and down every day, you're right. They do. Sometimes multiple times a day.
In the 1970s mortgage interest rates hovered in the 7 percent range and steadily increased, topping out at a whopping 18.45 percent in October 1981 for a 30-year fixed rate mortgage. The '80s saw mostly double-digit interest rates, and it wasn't until the 2000s we saw rates down under 6 percent. Today, rates are mostly in the 3 to 5 percent range.
Why so much fluctuation? Well, it's complicated. For starters, rates are determined by a combination of market forces, including:
Because mortgages are such big dollar amounts — the Mortgage Bankers Association reported the average loan request in March 2017 hit an all-time high at $313,300 — even a fraction of a percentage point can make a big difference in your monthly payment and how much you will spend on your home in the long run.
As an example, consider a home priced at $600,000 with the buyer putting $120,000 down. A 4 percent 30-year, fixed-rate mortgage would cost $91,644 in interest for the first five years, and a total of $344,974 over the full 30 years.
At 5 percent, the same loan amount would cost the borrower $115,383 in the first five years (a difference of $23,739) and $447,628 over the life of the loan (a difference of $102,654).
Most lenders offer 15-year mortgages with slightly lower interest rates, but because the payoff time is cut in half, the monthly payment is higher.
Want to run some numbers? Check out our mortgage calculators to estimate how much you can afford to borrow, your monthly payment, your closing costs, and more. You can also explore the pros and cons of renting vs. buying.
While interest rates are ultimately controlled by financial and governmental institutions, the Consumer Financial Protection Bureau says there are steps consumers can take to get the best possible rate on their mortgage.
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