Historic Mortgage Rates

Studying historic mortgage rates might make modern home buyers feel more confident about buying or refinancing a home now. To get the full picture of how mortgage rates have changed over time, you need to look at several year's worth of change.

Rates have been low for several years.

Average mortgage rates for homebuyers in the United States in the 1970s started off relatively low and were in single digits. By 1972, they were on the rise. A 30-year fixed rate mortgage in 1973 averaged just over 8 percent. A year later, interest rates had increased a full percentage point.

By 1979, the same 30 year fixed rate mortgage would carry an interest rate of just over 11 percent. 1980 saw interest rates continue to creep up to 13.74 percent. 1981 was the year that the average cost of borrowing money for a home in the U.S. reach an all-time high of 16.63 percent.

At this point in U.S. history, the country's inflation rate was running in double digits and the cost of borrowing money reflected this fact. However, if you had money on deposit with a financial institution you were likely getting returns of at least ten percent, if not more.

Consumers who wanted to buy a home were paying top dollar for the privilege, but banks were not reaping the benefits in increased profits. Instead, they were getting a five percent return on money they had loaned in prior years. The fact that banks had to pay out double digit rates of interest on deposits but were not able to recoup anything near that amount on loan products was cited as the reason for a number of them going out of business in the 1980s.

From that interest rate spike in 1981, mortgage rates have declined over time. In December of 2007, they were at the lowest rate in 35 years (6.34 percent for a 30 year fixed term).

For some home buyers, mortgages with a variable interest rate make sense. With an ARM, as the interest rates go down, the rate you are charged for your mortgage does the same. However, these types of loans are only a good idea if you expect that rates will stay stable or drop.

Banks began offering this type of mortgage product to consumers because they can benefit from them. When interest rates go up, banks also need to pay more in interest to people who have funds on deposit. When consumers have a variable rate mortgage the banks are able to take in more revenue based on the mortgage funds they have advanced. The bank is reducing its risk of suffering a loss similar to what took place in the early 1980s.

The lessons learned in 1981 with its historic mortgage rates are still having an effect on the way banks do business now. They tend to be relatively quick to raise mortgage rates, but it takes a lot more time for lenders to offer consumers lower rates even when the Federal Reserve cuts its rate.

Even with this fact in mind, mortgage rates tend to fluctuate. Home buyers are well served to consider the perspective of what has happened in the past as well as to pay attention to the current state of the financial markets. After all, taking historic mortgage rates into consideration when looking for a home loan can help you make a realistic decision regarding whether or not a particular type of mortgage loan is in your best interest.

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