When was the last time you saw an interest rate above 6 percent? In the last three years, interest rates have steadily declined from one record low to the next. Before the 2000s however, interest rates scaled much higher. While the shock of record low interests may have ebbed, we wanted to explore the history of interest rates to better understand the unprecedented yet very promising situation of the current housing market.
Before 2003, interest rates hadn’t dipped below 6 percent since the 1960s. For most of the late 1960s and 1970s, interest rates hovered between 7 and 9 percent. Then, starting in 1980, interest rates skyrocketed to record heights, touching 18.45 percent in October 1981. During the 1990s and early 2000s, rates went back to about 9 percent. However, since 2003, rates have been steadily falling. By historical comparison, today’s rates are incredibly low, clocking in around 3 percent. Here’s a snapshot of annual average interest rates over the past decade:
According to the Wall Street Journal, the trend of falling interest rates leads to reduced costs for homebuyers, giving a lift to the housing market. “A general rule of thumb holds that every one percentage point decline in mortgage rates is the equivalent of roughly a 10 percent reduction in the home price for the buyer,” reported the Journal in 2010.
New record lows seen in 2012 may impact homeowners who are looking to cut down on monthly mortgage payments. By refinancing at a rate just one-percentage point lower, a homeowner with a $400,000 30-year, fixed-rate mortgage can shave off at least $250 from their monthly payment. For first-time buyers or vacation home buyers, the current rates may allow them to afford a larger home or a home with extra features, like a swimming pool or a fenced-in backyard.
If there’s anything the historical record shows us, it’s that mortgage rates don’t last forever. Today’s lows will one day seem unfathomable, and families who had the keen foresight to take advantage of record low interest rates will reap big savings over the course of a 15 or 30-year fixed-rate mortgage.
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