Mortgage interest rates are relative

With mortgage rates on the rise, some homebuyers are choosing to take a break from the homebuying process and wait until more favorable rates are available again. The thought process behind this decision is understandable: Over the last decade we’ve seen rates in the 4% range, the 3% range and even the 2% range! So, does it make sense to move forward with the purchase of a home when rates are now in the 5% range? 


Don’t worry, this won’t be another article claiming to have mastered the intricacies of economics, thus allowing us to predict the future. Rather, we’re going to take a look at some historical data to put our current situation into perspective. 


Over the last 50 years, Freddie Mac reports that the 30-year fixed interest rates were generally between 5% and 10%. Interest rates peaked in 1981 at 18.63%, but that was a bit of an anomaly as rates could most often be found in the 6% to 7% range. In fact, it wasn’t until 2010 that rates finally dipped under that 5% mark, and it wasn’t until 2020 that we saw rates drop into the 2% range for the first time in Freddie Mac’s history.  


So, what does this data tell us? While it doesn’t serve as a prediction of what rates will do in the near term, it does demonstrate that the rates we’ve become accustomed to in recent past are something of an anomaly rather than the norm. In fact, the interest rates we’re seeing today remain relatively low when compared with historical averages.  While we have no way of accurately predicting what 30-year fixed interest rates will do in the near term, this does provide some confidence when shopping for a new home, knowing that the interest rates available today are actually, historically fairly low. This is particularly true when comparing the 30-year fixed monthly payment of a home purchased today, as compared to a home purchase in 1981. See the chart below for some comparative information that will likely make the current 2022 monthly payments on the same loan amount more palatable. 


Loan AmountYearInterest RateP&I Payment
$  400,000.00 20225.875%$      2,366.00 
$  400,000.00 198118%$      6,028.00 

Chart, histogram 
Description automatically generated

30-Year Fixed-Rate Mortgages Since 1971 from FreddieMac, https://www.freddiemac.com/pmms/pmms30

Allpoint It’s your money after all. Find a surcharge-free ATM