For many people, mortgage rates are the most important rates they will consider in their entire lives. Because of this, mortgage rates need to be understood and analyzed. This post delves into correlations that mortgage rates share with other interest rates and the maximum percentage of income that people should dedicate to mortgage payments. Looking at the 30 year mortgage rate graph from FRED doesn’t show much. One can see a huge spike in the rates during the early 1980’s, which can be attributed to high levels of inflation during that time. The closest comparable interest rate is the 10 year treasury rate. The rates almost perfectly match. If one compares the 30 year mortgage rate to a 1 year treasury rate, there is a much greater variance, but the general trends still remain. An important question becomes why the mortgage rate so closely follows the 10 year treasury rates. The answer comes from the average time the mortgage owner actually owns the mortgage. In other words, on average the mortgage is paid off in 10 years. For this reason, the 10 year treasury rate serves as a very accurate measure of the mortgage rate.
One of the more important facts homeowners need to know about mortgage rates is that a lower mortgage rate is better than a higher interest rate. This comes from the monthly payment the homeowner would pay. A lower interest rate means there is less interest to pay to the lender, so the monthly payments are lower. Similarly, a higher interest rate means the homeowner has to pay more interest compared to lower interest rates per month. Another important decision to make on a mortgage is whether to have a fixed-rate mortgage or an adjustable mortgage rate. A fixed-rate means the interest rate remains the same throughout the term of the mortgage, while an adjustable interest rate means the interest rate changes occasionally over the term of the mortgage. What are the advantages and disadvantages of both? When should a homeowner decide to use one over the other? Fixed-rate mortgages are most effective when the mortgage rate is low, while adjustable rates may be a better decision at high mortgage rates. After all, there shouldn’t be many people happy with paying 15% interest on a mortgage for 30 years. An adjustable rate would allow that to potentially fall over the 30 years and save the homeowner a boatload of money.
People can find mortgage calculators all over the internet that allow them to quickly determine how much they would pay every month for a given house price and mortgage rate. This allows a homeowner to determine the maximum mortgage a lender would give. The general cut-off for mortgages is a monthly payment no greater than 28& of monthly income. Most lenders would feel uncomfortable lending money to potentially higher risk homeowners, especially after the Great Recession. Overall, mortgage rates play a huge role in economy and should be understood thoroughly.