Summary of Interest Rates: A Historic View and Key Terms

Summary of Interest Rates- A Historical View and Key Definitions

Throughout the years, interest rates have fluctuated considerably hitting historic highs and all-time lows. This article will look at interest rates throughout the years and give you some insight into how different types of mortgages will affect the amount of interest you are paying.  

Mortgage Rates Since 1971

1971 was the year when Freddie Mac started surveying lenders. At the time, rates for 30-year fixed mortgages hovered right around the 7.29% to 7.73% mark.

After that, inflation went up and by 1981, the rates soared to a historical high of 18.63%.

Steps were taken to decrease inflation and by late 1982, rates were back to normal. They stayed in the single digit range for most of the next two decades and by November of 2012 they were down to an all time low of 3.31%.

Since then, interest rates have not fluctuated much and they are currently in the low to mid 3%.

Comparing 30 Year Fixed Rates to 15 Year Fixed Rates

Inflation plays a major role in the fluctuation of interest rates, but the type of mortgage you get will also affect your payments. Here is a bit of what you can expect in terms of interest rates on a 30-year fixed rate mortgage vs. a 15-year fixed rate mortgage.

Rates on a 30-year loan tend to be higher than rates on a 15-year loan. This is because lenders take an extra risk on 30-year loans. It is more likely a borrower will default on a loan in 30 years than 15.

Despite the fact that interest rates are lower on 15-year loans, most borrowers will opt for a 30-year mortgage. This is because the shorter repayment schedule of the 15-year loan results in a higher principal. Interest has to be paid off quickly as so the overall monthly payments are higher.

Fixed Rate vs. Adjustable Rate Mortgages

An adjustable rate mortgage is a mortgage that periodically adjusts to reflect the cost to the lender of borrowing on the credit markets. Five-year adjustable rate mortgages tend to have lower initial rates than 30-year fixed mortgages currently averaging about .37% lower.

The low initial rate periods offer short term savings for home buyers. However, if fixed rates are lower, consider refinancing your ARM to a fixed loan before the ARM resets.

An ARM offers temporary savings. Once the low rate period ends, the rate adjusts based on the index and margin you agreed on and it can’t rise above a certain level.

The index is what changes and it is tied to a benchmark rate. The margin is the fixed part and it’s added to the index to determine your rate after the initial rate period passes.

To understand this in plainer English, if you get an ARM with a 2/2/6 cap, it means that:

·        The first adjustment can’t exceed 2% over the initial rate.

·        The second adjustment can’t exceed 2% a year for subsequent adjustments.

·        The maximum rate increase will be 6% above the start rate for the life of the loan.

If you are looking to buy a home, a low interest rate will make for lower mortgage payments. Hopefully this article has provided you with information that will help you determine interest rate trends and find the mortgage that works best for you. Good luck making a smart decision with this important purchase.