March 22, 2021
Recently, mortgage rates jumped to their highest levels in almost a year. The 30-year fixed-rate mortgage has gained more than 30 points since the low in January 2021, though the current average rate on the 30-year fixed-rate mortgage is still well below the 20-year average of 4.9%. Rates also currently remain well below the rate in April 1971 when Freddie Mac first began tracking the 30-year fixed mortgage rates. Since that year, mortgage rates have hit some historic highs and lows. Worth noting is that the 15-year fixed rate has only been tracked by Freddie Mac since September 1991. Since that time, the 30-year fixed mortgage rates have always trended higher than the 15-year interest rate since the lender takes on the extra risk of default due to the longer term.
In 1971, the average mortgage rate was 7.31% - a rate that may seem relatively high compared to today’s rates. However, in 1974 the average annual rate of inflation began rising around that time before culminating at 9.5% in 1981. Lenders increased rates to keep up with rising inflation resulting in mortgage rate volatility. Corresponding hikes in the federal funds rate to combat inflation pushed the 30-year mortgage rate to an all-time high of 18.63% in October 1981.
Efforts in the early 1980s to control inflation did pay off and by October 1982 inflation fell back to normal historic levels. Subsequently, home mortgage rates remained in the single digits before ultimately dropping to 3.31% for a week in 2012. By 2018, the average mortgage rate was 4.85% and many economists expected it to rise above 5.5%. However, in 2020 rates plummeted in response to the coronavirus pandemic. By July 2020, the 30-year fixed rate dropped below 3% for the first time ever and it kept falling before hitting a new all-time 30-year fixed mortgage low of 2.65% in January 2021.
According to the National Bureau of Economic Research, mortgage rate history goes back about a hundred years. Prior to the 1930s, commercial banks and life insurance companies often issued short-term balloon mortgages with terms as short as three years. These loans were typically refinanced numerous times but were rarely paid off. With the onset of The Great Depression, home prices plummeted and there were a tremendous number of foreclosures. The “New Deal” included the creation of the Homeowners Loan Corporation (HOLC). In addition to making homes more affordable, its purpose was to refinance balloon loans into long-term, fully amortized loans with terms up to 25 years. In 1938, Fannie Mae was established with the aim of expanding credit availability and reforming lending standards. It wasn’t until after World War II, that rates began to rise.
To help understand the financial impact that mortgage rates have, the monthly payment for a $100,000 mortgage in 1981 was $1558.58. Compare that to the monthly payment of $423 for a $100,000 mortgage at a recent rate of 3.02%. That’s a difference of over $1000 per month and $13,000 per year for the same loan amount. It’s easy to understand why rates are an important factor when applying for a mortgage or refinancing. When mortgage rates are lower, buying a home can be more affordable. A lower payment may also allow for the purchase of a more expensive home. Additionally, when mortgage rates are lower, refinancing often becomes a prudent option because it replaces your current loan with a new loan at a lower rate.
Trying to predict future mortgage rates is no easy task. As we have seen, there are decades where the 30-year fixed rate remains relatively stable, and other decades where it has increased each year. Mortgage rates did recently hit a one-year high, so many homeowners are locking in today’s current rate to potentially save thousands of dollars each year in the future.