Nowadays everyone seems to be talking about mortgage interest rates.
Why do people track the interest rates daily?
Some people are news junkies. Others are considering purchasing a home or wondering if they should refinance their current mortgage. Others simply follow mortgage rates as away to gauge the overall economy’s health.
The result of this daily mortgage watching is that many people are completely unrealistic when it comes to deciding what is a good mortgage rate.
Mortgage Rates Since 1974
I know that it is frustrating when you realize that you just missed out on an interest rate of 4.75% for a 30 year fixed mortgage. That rate that lasted for about 3 seconds a month ago. You might feel cheated knowing that you are now stuck paying over 5%.
Seriously, anything under 6% is a fabulous mortgage rate. Just look at the chart below at the average interest rates for mortgages since 1974.
30 Year Fixed Rate Mortgages:
The safest mortgage product is a 30 year fixed rate mortgage (FRM). The average rate for 2009 is lower than it has been in 36 years…even lower than it was during the housing boom years of 2002-2005.
Adjustable Rate Mortgages & 15 Year Fixed Rate Mortgages:
Reporting agencies didn’t start tracking 5 year ARMs until 2005, but the rates seems to match the 15 year fixed rate pretty closely. However, there is a big difference between these two mortgage products.
Borrowers get a discounted rate on a 15 year fixed rate mortgage because the bank is taking less risk. The bank is getting their money paid back in 15 years instead of 30 years. The interest rate is locked for the full 15 years, but I’m guessing the risk of default is very low for people that choose 15 year loans vs 30 year loans.
People that choose an adjustable rate mortgage also get a lower interest rate compared to 30 year fixed rate mortgages but they still get to take 30 years to pay it back. Thus, they can borrow more for the same monthly payment amount. The problem is that the rate is only locked in for 5 years (or 1 year for a 1 year ARM). Then the rate can go up. The borrower gets a discount up front because the bank knows that they will get a higher interest rate later if rates go up.
During the housing boom, it seemed that almost everyone was choosing an ARM mortgage. The problem is that too many buyers didn’t plan for the worst case scenario. When their rates adjusted up, they could no longer afford their payments.
Adjustable rate mortgages can still be a good choice for some buyers.
I spent the first 5 years of my real estate career working with relocating buyers. Three years later, 1/3 of them had already moved. For relocating buyers who know that they will move in 2-5 years, an ARM is the smartest choice.
An ARM mortgage can also be a good decision for someone who knows they will move in the next few years. Five years after I bought my first house, interest rates dropped dramatically and I looked into refinancing my mortgage. I knew that I would move within 2-3 years, so I went ahead and got a 5 year ARM. It gave me a few extra years as a safety net, and I got the discounted ARM rate.
What is a Good Interest Rate?
Between 1974 and 2000, the average interest rate for a 30 year fixed rate mortgage only dropped below 7% one time.
The current interest rate of 5.375% is an amazing rate.
Don’t forget these low rates also come with discounted home prices due to the recession and a buyer’s housing market. It’s hard to imagine a better time to buy a home.
For first time buyers that also qualify for the $8000 federal tax credit, there won’t be a better time to buy for years to come.
But time is running out for first time buyers.
The federal tax credit only applies to purchases that close by December 1, 2009. Buyers that want to take a few months to find their perfect home along with the standard 4-6 weeks to close, need to get started soon or they could miss the deadline.
Live in the St. Louis area?
Email me or say hello on twitter if you would like to discuss your plans to purchase a home.
Not in St. Louis?
I have a network of experienced agents throughout the country that I can recommend. I’d be happy to talk with you about your needs and refer you to an agent in your area that will watch out for your best interests.
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PDF Possibly Related Posts:
- 1st Time Buyers – Buy Now for Once in a Lifetime Opportunity
- 100% Mortgages for Homes in Rural Counties
- Refinancing Your Mortgage at Today’s Low Rates Can Save You Money
- Housing Market Opportunity for Buyers that Act Now
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{ 1 comment… read it below or add one }
Hello Karen,
I’ve been reading your blog for awhile now and this post is excellent! I actually just posted a similar article on my blog which gets just a touch technical on the issue of rate changes. My basic point, echoing yours a bit, is that predicting the ‘right’ time to lock is essentially gambling. If you can afford to gamble, playing the market may make sense, especially if you know a bit about what affects rates. However, even well informed blackjack players statistically lose more than they win. The bottom line that you make clear is that the rates we’re experiencing right now are statistical outliers that make already lower home prices relatively even LESS expensive.
My article is here: http://markandersonmortgage.com/marksblog/?p=23
-Mark