How long will mortgage rates stay low?


Mortgage interest rates have been steadily dropping, and they've been doing that for a very long time — so long that most people can't even remember rates higher than, say, 7 or 8 percent. How short our memories are: Those with gray hair remember that rates haven't always been this low. This chart, compiled from Freddie Mac data, shows how the interest rate for 30-year fixed rate mortgages climbed as high as 18 percent not so long ago:

mortgage interest rates long

Can you imagine paying 18 percent on your mortgage?

Why bring up what some would regard as ancient history? It is to serve as a warning that the low rates we have had for so long are by no means a sure thing.

The mortgage interest rate, as the chart clearly shows, doesn't go up or down in a steady line — it has reached many bottoms on its way down. At each one, the chart turned up as rates climber, and people thought, “Aha! This is the end of the line. Surely interest rates will turn up now!” But then, after a few short months, mortgage interest rates turned south and continued their long-term free fall. Take a look at the sharp jump in 2013. Many people thought the end of 2012 brought a bottom in mortgage interest rates. But, as in the past, interest rates eased right back down again in 2014.

So now the question is being asked in many quarters: How long will this drop continue, and how far will it go? Is the 2012 bottom the real bottom or just another rest stop as rates plunge even further?

Here is a chart published on December 11 by Freddie Mac, showing weekly averages of the interest rates for the main types of mortgages for this year:

mortgage interest rates fmac

Observe the uptick during the past week of their survey. Although rates are extremely low, the ride may indeed be at its end. So … how long will mortgage rates stay low?

The Federal Reserve probably has more influence over that answer than anyone else. What do they say? The Fed's FOMC (open market committee) meets six times a year to assess the state of the economy and determine what action, if any, they need to take to keep all things economic on track. As most know, the Fed is not a Government institution; it's a private bank, owned by most big banks. They get their license to run the economy from Congress, under the condition that they ensure growth, stability and a job for all.

That mandate (growth, stability and employment) is what gives us the clues we need to figure out how (and when) the Fed will steer the economy. In particular, they look at three statistics:

Gross Domestic Product (GDP) Growth: The GDP is the most commonly used measure of the wealth generated by everyone in the country — individual, corporate and government. The measure looked at is not the value of the GDP, but its growth rate. At present, the economy is growing around 3 percent per year, which is about what they like to see. No need to keep interest rates low on account of GDP growth, then.

Inflation: The Fed uses the PCE price index and the Consumer Price Index (CPI), two measures of inflation at the consumer level. Ever since the Great Recession, they have wanted to see inflation rise to just over 2 percent. However, as of the last set of FOMC minutes, inflation was still hovering between 1.5 to 1.75 percent — not what the Fed wants, because they have a mortal fear of deflation. Low inflation, then, is still cause for them to keep their hands off the interest rate jack.

Employment: As the Great Recession moves further and further into the rear view mirror, unemployment keeps dropping. The latest number shows unemployment of 5.8 percent. The Fed's goal here is 5 percent or less, so it still isn't where they want it to be, especially as the Fed's chair, Janet Yellen, is very aware of other labor statistics such as the labor force participation rate, which are not nearly what they need to be to reflect a healthy economy. So the Fed is still keeping their hands in their pockets, and off the interest rate jack, on account of the employment situation.

Several readers have expressed strong opinions on how accurate or relevant official government statistics are (or aren't). The point here is not the numbers, it's that those are the numbers the Fed is watching (right, wrong or indifferent), and it's the movement in those numbers which prompts the direction they take as they deliver on their mandate to manage our economy. Therefore, the movement in those numbers give us the clues we need to determine which direction interest rates will be moving in general, and how mortgage interest rates in particular will move.

All three numbers are all moving in the direction of the Fed following through on its hint of raising interest rates sometime in late 2015. Mortgage interest rates are not set by the Fed, though — mortgage banks set those on their own. However, in a climate where the Fed begins to pull back on its efforts to expand the money supply and tug interest rates back up, the only logical conclusion is that the bottom we saw in mortgage interest rates toward the end of 2012 will indeed end up being the turning point.

That is a long way of saying chances are that interest rates are not going to stay this low for more than a few months at the outside.

How does this impact you? Two ways:

  • Refinancing your existing mortgage
  • Timing your decision to buy a house

The interest rate on your mortgage is a significant variable in your personal finances. On a 30-year, $250,000 home loan, a change in interest rate of 1 percent will add up to around $50,000 over the life of the loan — hardly small potatoes.

The implication, therefore, is pretty straightforward — if you had any thoughts of refinancing your home mortgage, now is the time to jump.

Buying a new home is not that straightforward, however. On the one hand, a low interest rate will cut your total cost; but on the other hand, prices in many major markets are approaching pre-recession highs, and buying now will hold the risk that your home's value will drop very soon after you bought it. So that is much more of a toss-up. If you live in a market where recent increases in home prices were modest, this is a good time to buy. In more volatile markets, you will have to judge a little more carefully.

How about you? How will a rise in interest rates, for mortgages or other debt, impact you, and what are you doing about that?

More about...Home & Garden

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
15 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Mr. Frugalwoods
Mr. Frugalwoods
5 years ago

We got our mortgage during the last major dip in mortgage rates back in 2012. So we’re sitting on a 3.85 30 year fixed rate. Seems like it usually only makes sense to refinance if you can get a rate that’s at least 50 basis points below your current rate… so we’re staying put unless rates drop to 3.35%. Can’t imagine they will though. My parents first mortgage was 13% back in the early 80s. I honestly can’t imagine that! I have a hunch that we’ll be telling our kids some day about our first mortgage and they’ll similarly not… Read more »

Tina in NJ
Tina in NJ
5 years ago

I remember my parents getting a 12% CD! But inflation was double digits, too. Once you factor in inflation, you get the real rate of return, and that doesn’t change as much over time. With all these 4% mortgages set for 30 years, a return to the hyperinflation of my youth would cause a huge financial crisis.

Johanna
Johanna
5 years ago
Reply to  Tina in NJ

If you spent your youth in the United States, what you experienced wasn’t hyperinflation. 10-15% inflation is high, but hyperinflation is a different beast entirely.

Johanna
Johanna
5 years ago

I wish the article had addressed that interest rates and house prices don’t move independently. If interest rates were to go way up, house prices would have to come down – otherwise nobody could afford to buy a house (except in markets dominated by cash buyers). For that reason, among others, I think interest rates will stay low for a long time. If most people can’t remember interest rates higher than 8%, then even fewer people can remember what it was like to be in an environment when interest rates were steadily rising, not falling, and they’ve forgotten how to… Read more »

Sherry
Sherry
5 years ago
Reply to  Johanna

Actually, you can do both. If you have a high mortgage balance and through some kind of windfall (bonus, inheritance or whatever) you can refi and fold the principle-reducing moneyin, thereby increasing your equity and often qualifying for a better interest rate, shorter term or both.

Johanna
Johanna
5 years ago
Reply to  Sherry

OK, sure, you can reduce the principal by paying down the principal. But that’s not really the equivalent of refinancing to a lower interest rate when rates drop, which saves you a ton of money at (almost) no cost to you.

Frank
Frank
5 years ago
Reply to  Johanna

Ditto to Johanna,

So few people explain the seesaw nature of house prices and interest rates. It is almost always better to buy with high interest rates and low prices and hope to refinance.

So tired or real estate agents saying that extreme lo interest rates make it a great time to buy. the opposite is true. but, hey, for them it is always a great time to buy.

Meatbone9
Meatbone9
5 years ago
Reply to  Frank

The issue is actually getting a mortgage at 18%. Speaking to people that lived it, the only way you were able to get a mortgage was through the military. An interesting aside, the interest rate to home prices isn’t a 1:1. Unless you were a distressed seller, or perhaps an empty house due to someone passing away, why would you sell?

Matt
Matt
5 years ago

If you can accurately predict the future of interest rates, I am skeptical that you would be writing blog posts instead of rolling around Scrooge McDuck style in piles of money.

Ann
Ann
5 years ago

We just refinanced our mortgage here in France. Originally we took out an 18-year mortgage at 3% interest. We had to pay 300 euros in fees to keep the same monthly payment but at 2.8% interest (fixed rate). In the end it works out to 5 payments we won’t have to make. Works for me!

RIck
RIck
5 years ago

Well if interest rates rise the price of homes will usually go down. Also with the amount of debt this country has I think the rates are artificially being held low by the FED otherwise the interest payments on future issued debt would get very expensive.

Bobby D
Bobby D
5 years ago

Question for the folks reading this that are more financially savvy than me: Many years of hard work came to fruition this year when equity I had in the company I work for was cashed out when the company was acquired. I used part of the proceeds to pay off our home loan which was about $200k at 4.1%. Now I’m wondering if that was premature and if I should actually pull money out of the house to invest in other low risk assets that should return greater than the cost of the money. I’ve been investing significant funds with… Read more »

Matt
Matt
5 years ago
Reply to  Bobby D

You’re forgetting about taxes. Also, there’s tremendous risk in what you’re proposing. A recession is likely to cause a wave of defaults on lending club notes, and would also impact your home’s value, maybe to the point where you’re upside-down on it. It’d be a double-whammy, and there’s always another recession coming. A more prudent approach would be to calculate the payment you’d have on the $360k note and instead put that into a tax advantaged account like a 401(k) or 529, if applicable. If not, a Roth IRA to the cap. Your best bet is to meet with a… Read more »

Sir Salty
Sir Salty
5 years ago
Reply to  Bobby D

I agree with Matt, that the risk levels of having to pay your mortgage (100% chance) are substantially more than the chance of achieving your 8.5% rate at lending club. But almost any investment includes some degree of risk. So don’t run from risk – just make sure you understand it. First analyze cash flow: You have to remember the fact that your mortgage (especially a 15 year) will have significantly more cash due than interest. The mortgage constant (including principal) is 8.59% on a 15 yr loan at 3.5%. So the monthly P&I will be about the same level… Read more »

a woman
a woman
4 years ago

My first mortgage was at 8.6%. I payed faster (asking a reduction of the period) and finally I finished.
I recommend for any person who take a new mortgage to have in first 1-2 years some pay down, and then to think to spend/invest in something else.

shares