Context Matters with Interest Rates

Yes, interest rates in 2023 were much higher than in 2020 through 2022, when interest rates on 30-year, fixed-rate mortgages hovered around the 3% range. It’s important, though to look at rates historically. If you do, you’ll find that today’s interest rates are actually more normal than the lower ones borrowers saw in 2020 through 2022.

The low rates were flukes
Those 3% interest rates on long-term mortgages were a nice gift. But they weren’t normal. As economists say, these low rates were a fluke of the COVID era. Rates on 30-year mortgages were never going to stay at 3% forever.

But what about today? Aren’t today’s mortgage interest rates excessively high?

Not really. It helps to look at the history of mortgage rates.

16% mortgage interest rates? Yep, they happened
According to Freddie Mac, the average interest rate on a 30-year, fixed-rate mortgage stood at 8.05% in 2000, higher than today’s average rates. And in 1994, 30-year loans came with an average interest rate of 8.38%

But that’s not as high as rates got. In 1981, homebuyers taking out 30-year mortgages paid an average interest rate of 16.63%. That’s far higher than the rates we are seeing today.

When looking at historic interest rates, it’s clear that today’s rates aren’t outliers. They are the norm. The average interest rate on 30-ear mortgages in 2021 of 2.96%? That was the outlier.

What you can do
If you’re worried about today’s higher interest rates, you can take steps to boost your odds of qualifying for the lowest possible rate today. You won’t get a rate of 3%, buy you might get one at or slightly lower than 7%.

The first step is to build a strong FICO credit score. Pay you bills on time each month and pay down as much of your credit card debt as you can. Doing this will steadily boost your score. FICO credit scores range from 300 to 850. If you can get your score at or above 800, you’ll have the greatest chance of nabbing a lower interest rate.

You can also come up with a larger down payment. The more down payment dollars you contribute when buying your home, the greater your odds of qualifying for a lower interest rate. That’s because lenders consider you a less risky borrower when you’ve already put a larger sum of cash into your home.

You can also buy discount points that lower your interest rate. Typically, a single point costs 1% of your mortgage loan. If you are borrowing $375,000,a point will cost $3,750. A point typically lowers your interest rate by 0.25%. Buying one point, then, can drop an interest rate of 7.5% to 7.25%.

You’ll have to determine if the costs of points are worth the savings a lower rate will bring you. Ask your lender to calculate how much you’ll save by lowering your rate to determine how long it will take to recover the costs of buying points.