Any real estate savant keeping a close eye on the market will notice even the slightest change, even if they’re not currently buying a home. Fluctuating interest rates can set buyers in a frenzy, be it one of panic or market enthusiasm. If you have been watching market trends for some time, you may have noticed the steady rise in interest rates during the past few weeks.
At the end of 2019, the interest on a 30-year fixed-rate mortgage averaged at about 3.65 per cent. When 2020 dawned and brought COVID-19 along with it, the Federal Reserve dropped the federal funds rate to between 0 – 0.25 per cent, which caused other short-term and long-term rates to drop, including interest on fixed-rate mortgages. Interest rates on fixed-rate mortgages continued to decline to reach a historic low of three per cent.
That is, until two weeks ago, when rates began to steadily rise again. On March 18, a Florida real estate magazine reported that the new average interest on a 30-year fixed-rate mortgage is 3.09 per cent, a 0.4 per cent increase from the previous week.
But what does this news mean for homeowners?
As always, we’re here to explain.
Why Rates Matter
It makes sense that lower costs in general might encourage a buyer to purchase a home. Thus, it follows that lower mortgage rates encourage home buying.
Lower rates translate to lower monthly payments and less interest accrued on the home when it’s paid off, which makes the purchase less costly. Buying a home at a low interest rate simply means you can afford to spend more. That’s what makes buying a house right now so appealing — and why savvy investors fear rates will continue to climb.
Even a slight fluctuation in interest rates can drastically affect the cost of monthly payments.
For example, if you were to purchase a home for $330K with a 20 per cent down payment ($66K) and you were given a 30-year fixed-rate mortgage with the current average interest rate of 3.9 per cent, your monthly payments would be $1,528.
But if you only qualified for a five per cent interest rate, your monthly payments would automatically increase to $1,700 — a difference of $172.
According to Investopedia, rates could continue to tip-toe towards five per cent in the near future. If you think that’s bad, imagine historic highs at triple that number…
Then and Now
As previously mentioned, Americans have never enjoyed mortgage rates as low as now — say for maybe two weeks ago. Once upon a time, however, sky-high interest rates made purchasing a mortgage nearly unattainable for the average homeowner.
In 1981, interest rates for 30-year fixed-rate mortgages reached an all-time high when they averaged at 16.63 per cent, according to data from Freddie Mac. Rates had rocketed from around 11 per cent at the end of the ‘70s, due mainly to a period of severe inflation that peaked in the early ‘80s.
During this time, the United States was also suffering from a recession as a result of an oil embargo instituted by the Organization of the Petroleum Exporting Countries (OPEC). The Federal Reserve increased short-term interest rates, and as a result, all interest rates increased, making it more expensive to borrow money. Anybody who wanted to buy a house would need to fork over a lot of money to pay for a mortgage.
Interest rates gradually decreased throughout the decade, and by the dawn of the ‘90s the average interest on 30-year fixed-rate mortgage hovered at around 10 per cent.
What to Expect
So, can homeowners expect interest rates to reach levels unseen since the days of double-processed perms and acid-wash jeans?
Well, not exactly.
There are myriad factors that affect the rise and fall of interest rates. Those can include anything from current events — such as the pandemic — to decisions made by lawmakers in Congress. Currently, economists are predicting that a Democrat-controlled Congress may push for more stimulus and other spending measures, thus flooding the market with too many bonds to pay for assistance programs.
This could mean bad news for buyers because the more bonds there are available on the market, the less they are worth. Since interest directly corresponds with the price of bonds, that means the cost of interest will rise as a result.
But does this mean we will enter another recession with interest rates at the third decimal place? No. In fact, a recession does not necessarily spell doom for the average homeowner.
The United States has conceived 47 recessions in its history. The most recent, aptly dubbed the “COVID-19 recession”, occurred from Feb. 2020 – June 2020. As a result of the recession, the Federal Reserve dropped the federal funds rate to encourage borrowing, eventually resulting in the lowest national average interest rate in history.
If you’re worried about a sudden escalation in mortgage rates, one thing to keep in mind is that three per cent was the lowest interest rate that has ever been available to American home buyers. That rate is no longer available, but the current rate of 3.09 per cent still is. Rates may increase slightly in another week or two, so if you have your eye on a house you love, now may be the best — the only — time to act.