Lowest Mortgage Rates in History and Its Impact on Home Sellers and Buyers

Dated: September 27 2020

Views: 92

Lowest Mortgage Rates in History and Its Impact on Home Sellers and Buyers

In July, the average 30-year fixed-rate mortgage fell below 3% for the first time in history.1 And while many Americans have rushed to take advantage of this unprecedented opportunity, others question the hype. Are today’s rates truly a bargain?

While average mortgage rates have drifted between 4% and 5% in recent years, they haven’t always been so low. Freddie Mac began tracking 30-year mortgage rates in 1971. At that time, the national average was 7.31%.2 As the rate of inflation started to rise in the mid-1970s, mortgage rates surged. It’s hard to imagine now, but the average U.S. mortgage rate reached a high of 18.63% in 1981.3

Fortunately for home buyers, inflation normalized by October 1982, which sent mortgage rates on a downward trajectory that would bring them as low as 3.31% in 2012.3 Since 2012, 30-year fixed rates have risen modestly, with the daily average climbing as high as 4.94% in 2018.4

So what’s causing today’s rates to sink to unprecedented lows? Economic uncertainty.

Mortgage rates generally follow bond yields, because the majority of U.S. mortgages are packaged together and sold as bonds. As the coronavirus pandemic continues to dampen the economy and inject volatility into the stock market, a growing number of investors are shifting their money into low-risk bonds. Increased demand has driven bond yields—and mortgage rates—down.5

However, according to National Association of Realtors Chief Economist Lawrence Yun, “the number one driver of low mortgage rates is the accommodating Federal Reserve stance to keep interest rates low and to buy up mortgage-backed securities.” According to Yun, “we will see mortgage rates stay near this level for the next 18 months because of the significance of the Fed’s stance.”6

HOW DO LOW MORTGAGE RATES BENEFIT CURRENT HOMEOWNERS?

Low mortgage rates increase buyer demand, which is good news for sellers. But what if you don’t have any plans to sell your home? Can current homeowners benefit from falling mortgage rates? Yes, they can!

A growing number of homeowners are capitalizing on today’s rock-bottom rates by refinancing their existing mortgages. In fact, refinance applications have surged over the past few months—and for a good reason.7 Reduced interest rates can save homeowners a bundle on both monthly payments and total payments over the lifetime of a mortgage.

The chart below illustrates the potential savings when you decrease your mortgage rate by just one percentage point. When it comes to refinancing, the bigger the spread, the greater the savings.

Estimated Monthly Payment On a 30-Year Fixed-Rate Mortgage

Loan Amount4.0%3.0%Monthly SavingsSavings Over 30 Years
$100,000$477$422$55$20,093
$200,000$955$843$112$40,184
$300,000$1,432$1,265$167$60,277
$400,000$1,910$1,686$224$80,368
$500,000$2,387$2,108$279$100,461

Be sure to factor in any prepayment penalties on your current mortgage and closing costs for your new mortgage. For a refinance, expect to pay between 2% to 5% of your loan amount.8 You can divide your closing costs by your monthly savings to find out how long it will take to recoup your investment, or use an online refinance calculator. For a more precise calculation of your potential savings, we’d be happy to connect you with a mortgage professional in our network who can help you decide if refinancing is a good option for you.

HOW DO LOW MORTGAGE RATES BENEFIT HOME BUYERS?

We’ve already shown how low rates can save you money on your mortgage payments. But they can also give a boost to your budget by increasing your purchasing power. For example, imagine you have a budget of $1,500 to put toward your monthly mortgage payment. If you take out a 30-year mortgage at 5.0%, you can afford a loan of $279,000.

Now let’s assume the mortgage rate falls to 4.0%. At that rate, you can afford to borrow $314,000 while still keeping the same $1,500 monthly payment. That’s a budget increase of $35,000!

If the rate falls even further to 3.0%, you can afford to borrow $355,000 and still pay the same $1,500 each month. That’s $76,000 over your original budget! All because the interest rate fell by two percentage points. If you’ve been priced out of the market before, today’s low rates may put you in a better position to afford your dream home. 

On the other hand, rising mortgages rates will erode your purchasing power. Wait to buy, and you may have to settle for a smaller home in a less-desirable neighborhood. So if you’re planning to move, don’t miss out on the phenomenal discount you can get with today’s historically-low rates.

HOW LOW COULD MORTGAGE RATES GO?

No one can say with certainty how low mortgage rates will fall or when they will rise again. A lot will depend on the trajectory of the pandemic and subsequent economic impact. 

Forecasters at Freddie Mac and the Mortgage Bankers Association predict 30-year mortgage rates will average 3.2% and 3.5% respectively in 2021.9, 10 However, economists at Fannie Mae expect them to dip even lower to an average of 2.8% next year.11

Still, many experts agree that those who wait to take advantage of these unprecedented rates could miss out on the deal of a lifetime. “With rates now at all-time historic lows, it’s hard to imagine that people may be holding out for something even better,” warns Paul Buege, president and COO of Inlanta Mortgage.12 Positive news about a vaccine or a faster-than-expected economic recovery could send rates back up to pre-pandemic levels.

Blog author image

Albert & Lynn Alvarez

Unparalleled Customer Service! Meet The Ally Group team member, Lynn Alvarez. You need an educated, caring and knowledgeable real estate professional who stands by you through the whole process. Tha....

Latest Blog Posts

CHAPEL COVE In Steele Creek, Great Neighborhood in Southwest Charlotte, NC 28278

Hi there, today I’m going to talk about one of the best neighborhoods in Charlotte, North Carolina 28278 known as the Steele Creek area near Lake Wylie. You are probably wondering where is

Read More

Want To Be A Homeowner? Here's How...

What You Can Do Right Now To Prepare for HomeownershipAs rent prices continue to soar, many renters want to know what they can do to get ready to buy their first home. According to recent data from

Read More

Why This Is Not A Housing Crisis Like In 2008

Why This Is Not Like 2008 AgainDuring the Great Recession, just over a decade ago, the financial systems the world depended on started to collapse. It created a panic that drove some large companies

Read More

Is Real Estate a Better Investment Than Stocks or Gold? Let's See The Survey

Americans See Real Estate as a Better Investment Than Stocks or GoldLast month, in a post on the Liberty Street Economics blog, the Federal Reserve Bank of New York noted that Americans believe

Read More