Worried About Interest Rates? Just Be Glad It’s Not the 1980s

Rising interest rates are a real concern today, but a recent blog post on Freddie Mac’s website helps put the topic in perspective.

Illustration of a home sitting atop stacks of moneyThe average interest rate on a 30-year, fixed-rate mortgage this week was 4.4 percent, up from 4.32 percent last week and 3.57 percent a year ago.

But in the 1990s, a comparable mortgage averaged 8.12 percent, and in October 1981 mortgage rates peaked at 18.63 percent. Ouch!

Freddie Mac, a federally chartered agency that works to make more money available for home loans, acknowledged that rates aren’t likely to return to November 2012’s record-low 3.31 percent any time soon, but it pointed out that they remain very low by historical levels:

  • In the 1970s, the average 30-year, fixed-rate mortgage was 8.6 percent. Monthly payments on a $200,000 mortgage were $1,589.
  • In the 1980s, The average 30-year, fixed-rate mortgage was 12.7 percent. Monthly payments on a $200,000 mortgage were $2,166.
  • In the 1990s, the average 30-year, fixed-rate mortgage was 8.12 percent. Monthly payments on a $200,000 mortgage were $1,484.
  • In the 2000s, the average 30-year, fixed-rate mortgage was 6.29 percent. Monthly payments on a $200,000 mortgage were $1,237.
  • This week, the average 30-year, fixed-rate mortgage is 4.4 percent. Monthly payments on a $200,000 mortgage are $1,002.

What is the likelihood that mortgage rates might soon return to double digits? Freddie Mac advises that you don’t lose any sleep over it. (And no one wants to revisit this scenario from 1981: At 18.63 percent, monthly payments on a $200,000 mortgage would be $3,117.)

Freddie Mac’s blog post also noted that rising interest rates and prices make many homes unaffordable for a median-income family in high-priced markets such as the Bay Area.

A map accompanying the blog post identifies San Francisco and San Jose as among the least affordable metro areas in the U.S. It also boasts an interactive component that allows you to determine mortgage payments in various cities for a median-priced home.

According to Freddie Mac’s tool, a San Francisco homebuyer who planned to put 20 percent down on a house with a mortgage rate of 4.4 percent would need to pay $3,974 a month to afford the median sales price of $682,000. San Jose buyers would be in for an even heftier monthly commitment: $4,513 to qualify for the $775,000 median price.

If you plan to buy a home in the Bay Area or the Tahoe/Truckee region, Pacific Union’s mortgage partner, Mortgage Services Professionals, can offer loan advice and consultation to help make your purchase a success.

(Image: Flickr/401(K) 2013)

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