Understanding trends in interest rates may help you evaluate the best time to take out a mortgage and save you thousands of dollars. Current mortgage rates as of January 2013 are significantly below their long-term historical averages. This can not only result in lower monthly payments on new mortgages and refinancing, but it can also have a positive impact on the economy as a whole.
According to figures provided by Freddie Mac, as of the end of 2012 the average 30-year mortgage interest rate in the United States from 1972 to 2012 was 8.69 percent. The highest monthly average in any year within that time period was 16.63 percent in 1981. The highest average 30-year mortgage rate in any month within that time period was 18.45 percent in October 1981. Conversely, the lowest monthly average in any year within that time period was 3.66 percent in 2012 and the lowest average 30-year mortgage rate in any month within that time period was 3.35 percent in December 2012. These figures indicate that in December 2012 mortgage rates stood at a level more than 5 percent less than their historical average over the previous 40 years.
Impact on New Mortgages
The impact of just a 1.0 percent reduction in your mortgage interest rate can save you a significant amount of money. With average rates at the end of 2012 sitting at more than 5.0 percent below their 40-year historical average, consider how your monthly payment would be impacted. A new 30-year $300,000 mortgage at the historical average rate of 8.69 percent would result in a monthly payment of $2,347.26. That same mortgage at the December 2012 average rate of 3.35 percent would result in a mortgage payment of only $1,322.14, a savings of more than $1,000 per month.
Impact on Refinancing
When interest rates come down, you may be tempted to refinance your existing mortgage. Consider if you took out a mortgage in December 2002 when the average 30-year mortgage interest rate was 6.05 percent. Your monthly payment would equal $1,808.31 and by December 2012 your mortgage principal would be down to $251,391.63. If you decided to refinance at this point for a new 30-year term at an interest rate equal to the monthly December 2012 average of 3.35 percent, your payment would be reduced to $1,107.92, reducing your monthly outlay by more than $700, although you would have increased your payment period by 10 more years. Before making the decision to refinance, consider all the fees and penalties imposed by the lender to ensure that your monthly savings is worth it.
When mortgage rates are low more people buy homes, which in turn creates positive economic results. By the end of 2012, cheaper mortgages were a key reason behind the U.S. housing market enjoying a resurgence in 2012. Lower mortgage rates also encourage people to refinance their mortgages. The resulting savings in monthly payment leads to more consumer spending and stimulates the economy.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.