Mortgage rates are at historic lows, but what does it mean to you?

Posted by Michael DiMella on Fri, Apr 17, 2009

I'm sure you've been hearing lately about how mortgage rates are at their historic lows, but how low is low compared to the past?  Take a peak at the first graph below for a clear look at the rate changes from 1972 to today.  The second chart shows mortgage rates this year so far - currently at 4.82%.  Both of these graphs are created using the widely watched Freddie Mac Mortgage Market survey data, which gives us the national average of 30 year fixed conforming loan rates (see current conforming loan limits in the Boston area).  As I wrote a few days ago, jumbo rates are also coming down a bit but are still much higher than the conforming rates shown in the graphs here:


These low mortgage rates (along with the $8000 first time homebuyer tax credit) are clearly driving a lot more activity in the Boston real estate market recently (especially in the sub-$500K market where the rates and tax credit are more of an option for buyers).  But what is the real impact of low rates on your monthly payments?

What do low mortgage rates mean to you?

What is the actual difference between a 4% rate and a 6% rate or even an 8% rate?  Most people understand that mortgage rates can make a big difference in the amount you have to pay each month for your loan, but how big a difference is it really?  Here's a quick chart that shows the monthly payments for different combinations of mortgage rates and loan amounts:

mortgage payment chart

As you can see, in this loan amount range, a 1% difference in mortgage rates can make anywhere from a $185 to a $340 difference per month (approximately $2000-$4000 per year).  So rates only 1% below what they were, say a year ago, can save you a lot of money on payments over the course of a year (or conversely, cost you more if rates rise).  Makes sense why lower rates cause more buyers to jump into the market.

As I previously wrote about in how the Fed injection of $1 trillion into the economy will affect real estate, I don't expect mortgage rates to rise (or fall) much in the short term but I do anticipate higher rates in the coming years as the inflation created by all of the stimulus money flooding the economy creeps into play.  It will be interesting to watch the mortgage markets react over the course of this year and into next year, that's for sure...


What are your thoughts?  Comment below!

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Tags: mortgage, buyers