Looking at mortgage rates historically over the last 30 years or so, mortgage rates were at an all-time high in the early 1980’s ― peaking at a whopping 15% on a 30-year loan in 1982. Since that time, however, there has been a gradual decline in mortgage rates. Currently, a 30-year mortgage loan can be obtained with a mortgage rate that’s around 5% APR.
What factors have historically affected the interest rate charged on home loans?
Interest rates, in general, are significantly influenced by the prevailing economy of the United States. When unemployment is low, the economy is strong and growing, and consumers are borrowing and buying confidently, there is a higher demand for funds (i.e. loans). When those demands are high, interest rates (including mortgage rates) increase.
Conversely, when unemployment is high but the economy is stagnant or in recession, investors aren’t taking risks, and consumers are cautious about spending money, there is less demand for loans. Since lending money is a business, funds may be available to loan but fewer consumers are utilizing them, and so the mortgage rates decrease to attract business.
Additionally, inflation will generally cause mortgage rates to rise and deflation will generally cause mortgage rates to fall. (Unless interest rates are forced to stay at artificially low levels.)
The level of foreign investment in U. S. industries also correlates to interest rates and mortgage rates. When foreign investments are plentiful and stable, fewer domestic funds are needed to fulfill lending obligations, leading to lower interest rates and mortgage rates. But as foreign investors begin withdrawing their funding, interest rates and mortgage rates rise.
Given the traditional rationale for the rise and fall of interest rates, the astronomical mortgage rates of the early 1980’s are difficult to comprehend. Additionally, given the similarity in the level of unemployment in today’s economy, it is worrisome for many to see such low mortgage rates. In the early 1980’s, the U. S. was in the throes of a recession with high unemployment and inflation setting records with interest rates around 13.5% in 1980. In an effort to starve out inflation, the Federal Governments’ Federal Funds Rate nearly doubled in two years time (1979 to 1981), rising from 11% to 20%. By mid-1982, the prime interest rate escalated to 21.5% and mortgage rates were around 18%.
During this timeframe, 91 banks failed ― nearly double the number of bank failures that occurred during the Great Depression. Surprisingly (according to FDIC’s “Failed Bank List”) in the last 10 years, there have been 322 bank failures. [See FDIC website www.fdic.gov/failed/banklist]
If you are currently thinking about refinancing your current loan or buying a house ― many agree that there has never been a better time. Mortgage rates are predicted to begin edging back up as early as April of 2011.