Over the last several months, mortgage rates have continued to decline thanks to institutional investors seeking the safe haven of bonds over stocks in this uncertain economy. When investors buy mortgage bonds, this tends to lower the rates.
As of last Thursday, August 26, Freddie Mac reported the lowest rates since they began keeping records in 1971 for 30 year fixed rates and 1991 for 15 year fixed rates. The average rate on a 30 year fixed rate mortgage was reported to be 4.36%. The average on 15 year fixed mortgages was reported to be 3.86%.
These rates are averages compiled from their weekly mortgage rate survey of lenders nationwide. Actual rates that borrowers receive vary according to a variety of factors, including credit score, loan-to-value ratio, origination charge and other risk factors. Freddie Mac does not dictate rates; they purchase mortgages from banks to free up capital for additional investment.
To put these rates in perspective, here's a chart of the average rates reported by Freddie Mac since the beginning of 2010:
So how long will this cheap money last? It's hard to say, but as long as uncertainty about solid growth and recovery persists, institutional investors may continue to prefer the safety of bonds over the risk of stocks. But predicting the market is tricky business, and a number of factors could affect this trend over the coming months and years.
Despite the weakness in the housing market, many homeowners are taking advantage of the low rates to lower their mortgage payments. In fact, refinancing currently makes up over 82% of all new loan activity in the market.
In the year 2000, Freddie Mac reported 30 year fixed mortgage rates reached as high as 8.52%. They once reached a high of 18.45% during the high inflation period of the early 1980s. During most of the 2000s, they've hovered between the mid 5% and low 7% range.
Once the financial crisis began to unfold in late 2008, the government began an unprecedented program to purchase mortgage-backed securities with the goal of keeping mortgage rates as low as possible. In December of 2008, Freddie Mac reported the average mortgage rate on a 30 year mortgage had dropped to 5.33%. And although this program ended earlier this year, mortgage rates have remained at or near historical lows because of continued investor demand for safe-haven investments. Fannie Mae and Freddie Mac bonds now carry an explicit guarantee, which essentially means they carry the same guarantee as US Treasury bonds. (It also means that taxpayers are on the hook for the losses).
Here are some examples of mortgage payments at various interest rates:
Monthly principal and interest payment on a 30 year fixed rate mortgage ($100,000 loan):
4%- $477.42
5%- $536.82
6%- $599.55
7%- $665.30
8%- $733.76
9%- $804.62
Monthly principal and interest payment on a 15 year fixed rate mortgage ($100,000 loan):
4%- $739.69
5%- $790.79
6%- $843.86
7%- $898.83
8%- $955.65
9%- $1,014.27
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