In the years since the Great Recession, mortgage interest rates have fallen to historic lows. In November of 2012, the average 30-year fixed mortgage rate hit the historic low of 3.31% —making it that much more affordable to finance the purchase of a new home.
Historically speaking, mortgage rates have remained relatively low since the great recession, with some fluctuation at times due to market conditions. As a result, we’ve become pretty accustomed to low mortgage interest rates.
In 2015, the Federal Reserve started a series of increases to the federal funds rate that continued through July 2019. In that month, the Fed decreased rates for the first time in a decade and twice more, for a total of 3 rate reductions in 2019.
When the federal funds rate was on its way up, some expected 30-year fixed mortgage interest rates to get back up to 5% or 6% in the not-so-distant future. If you’ve only been keeping an eye on mortgage rates over the last few years, these rates might seem a bit high.
After all, 30-year fixed mortgage rates have mostly stayed below 5% since 2011. Following the Fed’s recent actions, average 30-year fixed mortgage rates are expected to stay in close trading range with current levels through 2020.
But even if (and when) rates eventually do increase, from a historical perspective, a 6% interest rate range would bring us back to around 2006 levels and what has been a more average rate range for 30 year fixed mortgages over time.
So what makes mortgage rates change over time, and what events trigger those changes? Let’s take a look at the history of mortgages and mortgage rates over time to help shed some light on the changes that may be occurring now.
The History of Mortgage Rates
In the mid to late 1800’s farm mortgage banking developed that helped with expansion in the great plains. Farm mortgage banking moved from private to public with the passage of the Federal Farm Land Bank Act of 1916 which helped create 12 Federal Land Banks and the Farm Credit System to provide funding to farmers and ranchers using long term financing at low interest rates.
Mortgage banking moved from private to public for urban areas with the National Housing Act of 1934 was passed to help improve housing and make home loans more accessible and affordable. This also led to the creation of the Federal Housing Administration (FHA) mortgage loan insurance (MIP) program.
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Although language around mortgages (a loan secured by a property) can be found in English Law as far back as the late 1100’s, modern mortgages as we know them today weren’t really developed in the United States until the 1930s, when the National Housing Act was passed in 1934.
Before this time, borrowers mostly used private funding from insurance companies who didn’t expect to make money off of the interest rates at the time. Instead, they expected to be able to turn a profit by seizing properties when borrowers couldn’t keep up with their payments.
Still, borrowers were expected to be able to put down around 50% of the purchase price in order to secure a mortgage. And because of that, for most people, homeownership was still out of reach.
The housing market was needing intervention when in 1932 as many as one thousand homeowners defaulted on their mortgages every day and by 1933 half of all mortgages in the U.S. were in arrears. In 1934, the FHA decided to use mortgages as another way to help pull the country out of the Great Depression.
The FHA created a new type of mortgage that looks a lot more like the ones we have today, in which borrowers were able to get mortgages with much lower down payments. By initiating the program, the FHA pushed banks and other lenders to offer similar mortgages. At that time, interest rates were hovering around 6%.
Despite World War II, home ownership increased from 1940 to1945. This was attributed to war time rent control which covered over 80% of the U.S. rental housing stock.
Thus, in the first half of the 1940’s greater reductions in rent costs resulted in greater homeownership for owner occupants. When the war ended, however, we saw both the baby boom and a home-buying boom.
The Veteran’s Administration assisted veterans with mortgages that required no down payment and, in general, the demand for mortgages accelerated. However, it is good to note that U.S. homeownership rose by 10% between 1940 and 1945.
The 1950s and 1960s
The post-war housing boom continued into the 1950s and 1960s—an era known for the creation of the American suburb. Housing developments were springing up outside of cities nationwide. As a result, interest rates continued to steadily increase over this time from approximately the high 4% rate to the low 8% range.
In the early 1970s, mortgage rates began to rise even faster moving from the 7% range into the 13% range. This was largely due to the Arab oil embargo, which significantly reduced the oil supply and sent the U.S. into a recession with high inflation.
As a result, Federal Reserve Chairman Paul Volcker made a bold change in monetary policy to combat inflation. The policy changes were difficult but they set the stage for longer economic expansions of the 1980s and 1990s.
Rates hit their all-time high in October 1981 when the rates hit 18.63%. This made homeownership out of reach for many who otherwise may have bought homes around this time. The economy recovered and by the end of the 1980’s inflation was under control and rates moved down into the 10% range.
The 1990s and 2000s
In 1989 a recession began to form and the national recession of 1990 to 1991 reduced demand for both goods and services. As demand for homes increased in the late ‘90s and early ‘00s, the internet era began to change the way people buy homes and shop for mortgages.
Lenders also changed their lending practices and began to originate increasingly risky mortgage options (known as subprime mortgages) to draw in more borrowers. These loans were generally favored by borrowers with less-than-stellar credit or other alternative characteristics such as self employed for documentation relief.
Layering the risk of an overheated housing market combined with subprime loan programs lead to the poor performance of mortgages and loss of investor confidence.
In August 2007 the Federal Reserve began to address these issues through policy, but in December 2007 the Great Recession began for 18 months ending in June 2009. Mortgage rates dropped back down to below 6% and continued to decrease.
Mortgage rates steadily decreased, staying below 5% for the most part, but between 2007 and 2010 U.S. housing prices fell around 30%. It was during this time that the SEC began to take action against some lenders who were considered villains in the subprime scandal.
Countrywide Lending for instance, agreed to pay $67.5 million dollars in penalties and reparations to investors. A sharp drop in home purchases occurred in 2010 due to the expiration of the Federal First Time Homebuyer Tax Credit Program. By years end the housing market was only down around 4.1%, projecting an increase into 2011 depending upon things like unemployment and foreclosure activity.
Why Do Mortgage Rates Change?
As we can see from looking at interest rate fluctuations, major economic events can have a big impact on mortgage rates both in the short and long term. But how do these changes actually happen? That has to do primarily with the Federal Reserve. In December 2015, the Federal Reserve ended seven years of near zero rate policy and began a series of rate increases that ended in 2019 with 3 rate cuts.
Federal Reserve actions influence nearly all interest rates, including mortgages through the prime rate, long term treasury yields, and mortgage backed securities. The Federal Reserve sets the federal funds benchmark rate, which is normally the overnight rate at which banks lend money to each other.
This rate impacts the prime rate, which is the rate banks use to lend money to borrowers with good credit. Most adjustable short term rate loans and mortgages use the prime rate to set the base interest rates they can offer to borrowers. So, after the Federal Reserve raises or lowers rates, adjustable short term mortgage loan rates are likely to follow suit.
Longer term mortgage rates have also risen and fallen alongside economic and political events with movement in long term treasury bond yields. In the short term a Fed Rate change can affect mortgage markets as money moves between stocks and bonds which can have an effect on mortgage rates. Longer term mortgage rates are influenced by Fed rate changes but don’t have as direct an effect as with short term rates.
Can Changing Rates Affect Your Existing Mortgage?
Maybe—the answer depends on what type of mortgage you have. If you took out a fixed-rate mortgage, your original interest rate is locked in for the entire time you have the home loan, even if it takes you 30 years to pay it off. That’s not necessarily the case if you have a mortgage with a variable interest rate, often called an adjustable-rate mortgage.
With this type of home loan, you may have started off with an interest rate that was lower than many fixed-rate mortgages. That introductory rate is often locked in for an initial period of several months or years.
After that, your interest rate is subject to change—how high and how often depends on the terms of your loan and interest rate fluctuations. These changes are generally tied to the movement of interest rates as a whole, but more specifically which index your adjustable rate mortgage is tied to, which can be affected by the Fed’s actions.
However, most adjustable-rate mortgages have annual and lifetime rate caps that limit how high your interest rate and payments can change.
Tracking Changes in Mortgage Interest Rates
There are many factors to consider when buying a home. While some buyers may want to take advantage of historically low interest rates for a mortgage, understanding your budget and home affordability before taking the plunge is recommended.
After assessing your budget and affordability, you may want to give yourself time to save up for a larger down payment. Buyers who put down less than 20% may end up paying private mortgage insurance, which typically costs between 0.3% and 1.5% of your loan amount annually.
Finally, you may want to take time to review your credit history for any errors that may need addressing. The federal government offers a free annual credit report that will show your payment history and balances, but not your credit score.
Putting your best financial foot forward when applying for a loan could help you obtain better loan terms. All of these factors may be worth considering before applying for a home loan, regardless of where interest rates are.
If you already have a mortgage, keeping an eye on interest rates may help you decide whether it’s a good time to refinance your mortgage. If rates are trending downward compared to the rate on your existing home loan, you may benefit from a lower interest rate than you’re currently paying.
Your ability to get a better rate depends not only on how rates are trending, but also on your credit history, financial profile, and other factors. But if interest rates have generally fallen quite a bit compared to when you closed on your current loan, refinancing could be worth looking into.
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