Mortgage Rates Continue to Drop

While the current interest-rate environment is frustrating for fixed income investors, it’s good news for would-be homebuyers and existing homeowners looking to refinance.  And, with any luck, it may provide a boost to the economy as we enter what is traditionally the home-buying season. According to Freddie Mac, the interest rate on a 15-year mortgage dropped to 2.97 percent and the average rate on a 30-year mortgage dropped to 3.75 percent.  These rates represent the lowest rates in history.  For those who are able to qualify for home loans, these rates offer an amazing opportunity to purchase a new home or refinance an existing loan.

To give you an idea of how much your interest rate affects your payment, I’ll put it into dollars.  Interest rates for 30-year mortgages peaked in late 1981 at over 18 percent.  If you purchased a home for $100,000 in 1981, your principal and interest payment would have been $1,507.09 and you would have paid a total of $442,550.73 in interest over the life of the loan.  If you purchased a home for $100,000 today, assuming you qualified for the very best rates, your principal and interest payment would be $463.12 and you would pay a total of $66,721.61 in interest over the life of the loan.

If low interest rates compel more people to purchase or refinance a home, we should all eventually derive at least some benefit from these historically low rates.  As home sales rise, home builders gain confidence and break ground on more homes, which creates jobs, which leads to a decline in the unemployment rate, which improves consumer confidence, which encourages the average consumer to spend more money, and so on.  Likewise, when existing homeowners refinance, they pay less interest on their loans and therefore have more money to spend elsewhere.

So, if you are frustrated with your ability to derive income from your portfolio, try to take comfort in the fact that someone, somewhere, is closing on their very first home at a historically low interest rate.