It may seem like mortgage interest rates will always be around 4% APR. But don’t get lulled into a false sense of security – it could cost you. That’s because history tells us two things:
One: Despite inching up in recent months, rates are still historically very low right now. Consider the fact that out of monthly data from the Federal Reserve that goes back to April of 1971, there are only 33 months out of 539 in which the interest rate was under 4%*. That’s just over six percent of the time.
Two: Rates are not static. They change. Annually, monthly, daily. And a one percent change in interest rate can cost you tens of thousands of dollars over the life of your mortgage.
The history lesson? Take advantage of low, low rates while you can.
The Double-Digit ‘80s
How would you like to charge your home on your credit card? Because if you were suddenly beamed back to 1981, that’s essentially what you’d be doing. For much of the ‘80s, mortgage rates were double digits, and in October of 1981, they hit 18.45% – that’s three points higher than today’s national average credit card interest rate.
To put that in perspective, a 30-year, fixed rate mortgage for $300,000 and an APR of 18% would result in a monthly payment of $4,521 and a lifetime interest cost of $1.328 million. That same loan at a rate of 4% APR would carry a $1,432 monthly payment and cost only $215,609 in interest over the life of the loan.
That’s over a million dollars more in interest. And that’s a trend even the most diehard ‘80s fan doesn’t want coming back. But…
There’s Probably Only One Way Rates Will Go…
…and it’s not down. Of course, no one is suggesting that interest rates are going to climb to Reagan-era levels. But most believe rates have nowhere to go but higher.
In fact, in December of 2015 the Federal Reserve, which sets monetary policy, raised rates for the first time in years, by a quarter of a percent. More recently, in March, the Fed announced that, while they would definitely go slow, their plan is to gradually raise interest rates this year. Most analysts predict two quarter-percent rate hikes in 2016.
And if a few quarter percent rate hikes don’t sound significant, consider that each quarter percent increase on that $300,000 mortgage represents about $45 more per month and over $25,000 more interest over the life of your loan. Not quite the ‘80s, but not something that makes you want to party like it’s 1999 either.
So Where Can You Find the Best Rates?
Sites like LendingTree, one of the nation’s most respected loan comparison websites, help you shop rates to find the mortgage that fits you best. Best of all, it’s free and easy. Lenders compete to win your business by giving you the best rate and terms, and you choose the loan you want.
*Federal Reserve data on interest rates is not listed as APR, which is typically slightly higher.