2010 has seen the lowest interest rates for the longest period of time in the last 40 years. Rates in the 4% range were unheard of prior to 2010. Rates in the 5% range were unknown prior to 2003. The current rate average rate for a 30 year fixed rate loan is 4.97% as of 12/22/10. Rates on a 30 year loan dipped into the low 4% range earlier this year. Rates for a 15 year loan dropped to 3.75%.
Prior to the great depression, it was very difficult to purchase a home. A 50% down payment was required and rates averaged between 6% to 7%. In 1934, President Franklin Delano Roosevelt created “The New Deal “, to restructure the economy. Part of the New Deal was the establishment of the Federal Housing Authority, which insured mortgage loans to low income borrowers with low down payments. Interest rates averaged in the 5% range for a 20 year fixed rate mortgage. After World War II, the Veterans Administration was created offering no down payment loans to returning veterans. In 1948 FHA stretched the term of the loan to 30 years.
The 1960’s saw a healthy economy. Rates averaged between 5% – 6%. By the end of the 1960’s into the 1970’s, inflation became out of control. Interest rates climbed to keep ahead of inflation. Interest rates were 8.75%, in the mid 1970’s. By 1981, interest rates rose to 18.5%. At this time adjustable rate mortgages became popular. In 1984, the average rate for an adjustable rate mortgage was 10%. Toward the end of 1985, interest rates started dropping below 10% and hovered around the 9% range.
During the 1990’s the Federal Reserve had inflation under control and the rates dropped below 8% causing a refinance boom. As rates dropped lower and lower, borrowers refinanced over and over again which caused an industry bottleneck. Some lenders refused to lend on refinance loans choosing to focus on purchases.
Subprime lending became popular in the mid 1990’s with the stated income, stated asset programs and loose credit guidelines. Internet lending became popular and there were a variety of loan programs. Most of the programs were for adjustable rate mortgages to compete with prime lending rates. Over time industry abuse and increase in payments led to the current mortgage crises.
After George Bush was elected President in 2001, rates dropped below 7% and have been fluctuating between 5% – 6.5% for a 30 year loan. Rates dropped into the upper 4% range for a very short time in 2003, but quickly rose to 5.5%.
Will interest rates continue to drop or have they hit bottom? Rates have fluctuated greatly over the past few years, but have continued to remain low. Buying a home right now is still affordable and anyone who has not refinanced in the past 5 years should consider refinancing now. With a democratic president and the economy needing a boost, chances are that interest rates will continue to climb.