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Since 1971, historical mortgage rates for 30-year fixed loans have hit historic highs and lows due to various factors. Using data from Freddie Mac’s Primary Mortgage Market Survey (PMMS), we’ll do a deep dive into what’s driven historical mortgage rate movements over time, and how they affect buying or refinancing a home.
Historical mortgage rates: 1971 to 2020
In 1971, the same year when Freddie Mac started surveying lenders, 30-year fixed-rate mortgages hovered between 7.29% to 7.73%. The annual average rate of inflation began rising in 1974 and continued through 1981 to a rate of 9.5%. As a result, lenders increased rates to keep up with unchecked inflation, leading to mortgage rate volatility for borrowers.
The Federal Reserve combated inflation by increasing the federal funds rate, an overnight benchmark rate that banks charge each other. Continued hikes in the fed funds rate pushed 30-year fixed mortgage rates to an all-time high of 18.63% in 1981. Eventually, the Fed’s strategy paid off, and inflation fell back to normal historical levels by October 1982. Home mortgage rates remained in the single-digits for much of the next two decades.
The mortgage rates trend continued to decline until rates dropped to 3.31% in November 2012 — the lowest level in the history of mortgage rates. To put it into perspective, the monthly payment for a $100,000 loan at the historical peak rate of 18.63% in 1981 was $1,558.58, compared to $438.51 at the historical low rate of 3.31% in 2012.
This year, interest rates are expected to stay around 3.8%, according to Freddie Mac. This is good news for consumers as home prices continue to rise.
Comparing 30-year fixed rates vs. 15-year fixed rates
Looking at interest rates over time, 30-year fixed mortgage rates have always trended slightly higher than 15-year interest rates. That’s because the lender takes on extra risk that you might default over a longer period of time. Comparing a 30-year mortgage rates chart and a 15-year mortgage rates chart, you’ll see that rates remain near historic lows.
Homebuyers often choose a 30-year fixed mortgage for the stability of a fixed, low monthly payment. The higher rate and longer loan term result in higher lifetime interest charges.
Fifteen-year fixed mortgage rates, however, are typically lower. That means you pay less interest over the life of the loan. The shorter repayment schedule increases your principal and interest payments, though.
Lenders offer more than just 30- and 15-year terms. You may find 10- to 40- year terms at some lenders.
Below is an example of the cost difference between a 15- and 30-year fixed mortgage at current mortgage rates.
˟Freddie Mac PMMS reported interest rates as of Jan. 23, 2020
˟˟Principal and interest only. Does not include mortgage insurance, property taxes, homeowners insurance or HOA fees.
Fixed-rate loans vs. adjustable-rate mortgages
Average rates for five-year adjustable-rate-mortgages (ARMs) have historically offered lower initial rates than 30-year fixed-rate mortgages. If you compare mortgage rates since 2005, 5-year ARM rates have trended lower than 30-year fixed rates. Interest rates for ARMs are 0.37 percentage points lower than fixed-rate mortgages through 2019.
With lower initial interest-rate periods available from three to 10 years, ARMs could offer short-term savings for homebuyers. If fixed rates are lower, though, it makes sense to consider refinancing your ARM to a fixed loan before the ARM resets.
The savings offered with an ARM are temporary. Once the initial low-rate period expires, the rate will adjust based on the index and margin you agreed to, and can’t rise above a certain level, called a cap.
The index is the moving part of your ARM and is tied to a benchmark rate. The margin is the fixed part and is added to the index to determine your rate after the initial-rate period passes.
For example, a 5/1 ARM loan with 2/2/6 caps means:
- The first adjustment can’t exceed 2% above the initial rate.
- The second adjustment can’t exceed 2% per year for subsequent adjustments.
- The maximum rate increase is 6% above the start rate for the life of the loan.
How historical mortgage rates affect homebuying
When mortgage rates are lower, buying a home is more affordable. A lower payment may also help you qualify for a more expensive home. The Consumer Financial Protection Bureau (CFPB) recommends keeping your total debt, including your mortgage, to 43% of what you earn before taxes (known as your debt-to-income ratio, or DTI).
When rates are higher, an ARM may give you temporary payment relief if you plan to sell or refinance before the loan resets. Ask your lender about convertible-ARM options that allow you to convert your loan to a fixed-rate mortgage without having to refinance before the fixed-rate period expires.
How historical mortgage rates affect refinancing
When mortgage interest rates slide, refinancing becomes more attractive to homeowners. A refinance replaces your current loan with a new loan, typically at a lower rate. The extra monthly savings could give you wiggle room in your budget to pay down other debt or boost your savings.
If the equity in your home has grown, you can tap it with a cash-out refinance and make home improvements. With this type of refinance, you’ll take on a loan for more than you owe. You can use the extra as cash to make home improvements or pay off other debt. Lower rates may help minimize the larger monthly payment.
When rates go up, there’s less financial benefit to refinancing. Another caveat to refinancing, in general, is ensuring that you stay in your home long enough to recoup closing costs. To do this, divide the total loan costs by your monthly savings. The result tells you how many months it takes to recoup refinance costs, called the breakeven. The quicker you reach your breakeven, typically, the more cost-effective the refinance becomes.