The Future of Mortgage Interest Rates

Data for 30-year fixed mortgages have been tracked by Freddie Mac since April 1971. The average monthly mortgage rate during that time is 8.62 percent. This long-term average is as simple and straightforward a definition of a “normal” mortgage rate as you’re likely to find. If you are interested in figuring out how much your mortgage would be with a “normal” mortgage rate, use a mortgage calculator that takes all taxes and fees into account.

While certainly simple, averages can be less than accurate predictors. The average income of film actors, for example, might seem pretty attractive, but if you throw out the earnings of the Robert Downey Jrs. you’re left with a lot of waiters. So another way to define a normal level of mortgage rates is to look at where they are most often. Based on annual averages from Freddie Mac, in the 41 complete calendar years of data available, rates ranged between six and nine percent about 44 percent of the time. This suggests that the long-term average of 8.62 might be skewed upward by about one percent due to abnormal occasional rate spikes.

So far, the history of mortgage rates shows they can be much higher than today’s current levels. However, inflation is also usually higher than it is now. According to the Bureau of Labor Statistics, while 30-year mortgage interest rates were averaging 8.62 percent, inflation was averaging 4.3 percent. Lenders had a 4.32 percent cushion. With today’s annual inflation at just 1.4 percent, adding that same 4.32 percent cushion gets us a 5.72 percent mortgage rate under current conditions. This would seem to indicate that they are lower, perhaps, than they “should” be.

Pessimists don’t take a lot of comfort in averages or trends, because a long-term trend might not have much bearing on a more immediate reality. After all, a drunk can stagger one way, then another, and on average he’s walking a straight line – until he veers off a ledge. Most of the above examples are based on historical norms, but if you are a worst-case-scenario type of person, you may want to know exactly how high average rates have gone. That number is 18.45 percent, which was reached in October of 1981. That’s unlikely to be reached again, but remember that mortgage rates are fairly close to the extreme low, and thus also unlikely to occur again.

Another thing mortgage rate averages don’t capture is the speed with which things can happen. When rates move lower, they tend to drift down in a rather gentle fashion as lenders carefully determine the highest rate they can charge and still keep their pipelines full. When inflationary pressures kick in, however, mortgage lenders are as fear-driven as everyone else. They raise rates first and ask questions later. In June of 2013, mortgage rates rose over .5 percent in a single week and hit their highest levels in nearly two years! Since Freddie Mac began tracking mortgage rates, the biggest year-over-year increase was 5.83 percent. If that were to happen again, we’d be looking at rates near 10 percent this time next year.

What the history examined above tells us about what is most likely to happen is neither a three percent party nor a cataclysmic repeat of 1981: if inflation is controlled, mortgage rates are likely to rise to into the high-five percent range. If inflation hits pre-recession levels, then mortgage rates would be more likely to eventually reach the seven-to-eight percent range (rates have not been higher than seven percent since 2002).

While history can’t tell you exactly what’s going to happen next, it does make it clear that you should not take mortgage rates in the four-to-five percent range for granted.

1. If you’ve been wondering when to buy a house, sooner is probably better than later
2. If you can save money by refinancing, don’t hold out for an even better deal. What you see now may be the best chance you get.
3. If you are trying to decide between adjustable and fixed-rate mortgages, keep in mind that the potential for rates to rise from current levels makes adjustable-rate mortgages risky right now. Unless you know you’re not keeping your home (or your loan) more than a few years, you should probably choose a fixed mortgage.
4. Check your caps and floors if you already have an adjustable rate mortgage. You can worry less if your rate is capped at a max of, say seven percent, than you would if it’s at 12 percent.

Studying mortgage rate history is a great way to learn from other people’s mistakes. However, you still have to apply what you learn to your own situation.

Author Bio: Gina Pogol spent over a decade in mortgage lending, originating, processing and underwriting home loans. She has written about mortgage and finance issues for a number of publishers since 2006. Currently a senior marketing manager with Lending Tree, Gina advocates for consumers and loves answering their mortgage and personal finance questions. For more information: https://www.lendingtree.com/home-loan-overview