What Historical Mortgage Rates Can Teach Us About The Current Interest Rate Environment

Life would be so much easier if people had the power of perfect foresight. Unfortunately, we don’t. It gets even harder in times of great change like what we’ve seen in the mortgage market in 2022. It’s natural to hesitate if you’re considering buying a house or refinancing when even the slightest rise can impact the cost of your mortgage loan.

If psychic abilities aren’t an option, at least hindsight is 20/20. The past often serves as a useful guide to the future. With that in mind, we thought we would look to historical mortgage rates to shed some light on what might happen next.

What Are Historical Mortgage Interest Rates?

Freddie Mac, the government-sponsored enterprise (GSE) and major backer of conventional mortgage loans, has been publicly tracking average mortgage rates since April 1971. Rates for various terms and types of mortgage have been tracked throughout the years, but one constant has been its tracking of 30-year fixed-rate mortgages, among the most popular options.

The Freddie Mac Primary Mortgage Market Survey^® (PMMS) is the most reported on indicator of rate movements in the residential mortgage market. The St. Louis branch of the Federal Reserve (the Fed) routinely updates a graph for users to easily track the movements of the 30-year fixed as reported by Freddie Mac throughout the years.

If you look at the trendline of this graph, you see that rates are cyclical. Mortgage rates are historically tied to movements in the bond market. In general, if people think things are going well, they’ll invest more in stocks, which offer a chance for a higher return, but also more risk. If people have misgivings, they’ll invest more in bonds, which are considered safer.

To understand the movement of mortgage rates, it helps to track the movement of bond yields. When there’s less demand for bonds (economy doing well), yields, or rates of return, have to be higher to attract investors and mortgage rates are higher. When people have more worries about the future, there’s more demand for bonds. Yields and mortgage rates are lower.

Below is a graphic of historical mortgage rates from April 1971 – December 15, 2022. To keep the graphic from being too crowded, the graph is tracking rates from the first week of every quarter.

Why Are Interest Rates Constantly Changing?

If you’re looking to understand how interest rates are set, it’s important to understand that both personal and macroeconomic factors play a role.

We touched a little bit on bond market movements above, and if you’re looking for a general rule, when things are going well, not as much money is invested in the safer bond market as people look for higher returns from stocks. If people expect the economy to take a turn for the worse, bonds offer a guaranteed return which is attractive. Mortgage rates end up lower.

The Fed can also play a role. Housing occupies such a prominent place in the economy. One estimate from the beginning of 2022 courtesy of the National Association of Home Builders puts housing’s contribution to gross domestic product – one of the most-tracked measures of economic growth – at 16.4%.

Because housing has such a major impact between construction jobs, furnishing and everything that goes into maintenance, one of the things the Fed will do to combat a recession is cut a key target interest rate to encourage borrowing. However, beginning after the 2007 – 2008 financial crisis and again during the pandemic, the Fed specifically became the biggest buyer of mortgage bonds.

Because investors realized that they could count on the Federal Reserve to purchase their bonds, the yield on those bonds stayed lower and mortgage rates were also low. They’ve only gone up this year as the Federal Reserve has looked to raise the target for the federal funds rate and offload their holdings of mortgage-backed securities (MBS), doing both to combat inflation.

The idea behind changing the target for interest rates and selling MBS is that it makes borrowing money more expensive. The theory is that this makes people cling tighter to the money that they have rather than spending it and prices come down. The Fed would also like to see home price growth slow because that’s been a major contributor to inflation while mortgage rates are also up.

However, as much as macroeconomic factors affect your rate, your personal financial profile plays a role, too. It’s also the only thing you can control.

The two biggest determinants of your rate from a personal perspective are your down payment or equity amount and your credit score. In both cases, the higher the better. They both signify less risk for lenders. You’ll also get a lower rate on a primary property you live in the majority of the time when compared to a second home or rental property.

Are Interest Rates High Or Low Right Now?

The answer to this question depends on the time period with which today’s rates are being compared. Where we find ourselves now is not the lowest rates have ever been, but it’s nowhere near the highest, either.

To give you an idea of where we stand in context, let’s compare the average Freddie Mac-reported 30-year interest rate for December 15, 2022, to the highest and lowest rates ever recorded. We’ll use a $250,000 loan amount.

The reported rate for a 30-year fixed-rate mortgage during the week of December 15, 2022, was 6.31%. On a $250,000 loan amount with a 30-year term, your monthly payment would be $1,549.06, not including taxes and insurance. With this interest rate, you would pay $307,662.31 in total interest if you carried the loan the full term.

The lowest rates ever got was in January 2021 when the 30-year fixed averaged 2.65% early in the month. Holding everything else constant, the monthly payment with this interest rate would be $1,007.41 and the total interest paid over the life of the loan would be $112,667.41.

We would have to go a long way to reach where rates were in October 1981 at 18.63%. Keeping the same loan amount and term, the monthly payment would be $3,896.46. You would be looking at total interest paid as a little under $1.153 million. It’s worth noting that the cost of the average home at that time, according to the Census Bureau, was only about $82,500, but still.

So while we aren’t where we were in 2020 – 2021, it could be a lot worse.

What Are The Key Moments In Mortgage Rate History?

While there are many times there have been major swings in mortgage rates, three time frames specifically stand out.

1981

During this period, the U.S. found itself at the center of a lot of geopolitical turmoil in and around the Middle East. Largely as a result of this, OPEC imposed an oil embargo on the U.S. The loss of such a major source of oil caused gas prices to spike. This resulted in high inflation, the likes of which hasn’t been seen since.

Gas prices tend historically to be a major driver of inflation or lack thereof. If gas prices spike, the cost to transport every other good and provide services often rises substantially.

2008

In 2008, there was a financial crisis caused in large part by flexible qualifying requirements, which enabled people to obtain loans that inevitably made it difficult for them to make their mortgage payments.

A wave of foreclosures lead the Federal Reserve to purchase lots of MBS to stabilize the mortgage market and provide access to credit for qualified borrowers. In the wake of the crisis, many major laws governing financial regulation were passed that are still in effect today to prevent future repeats of this.

2020

Mortgage rates plunged in 2020 – 2021 as the Federal Reserve worked to stimulate the economy as the U.S. battled COVID-19. Housing is a huge economic driver and they wanted to make sure that people who qualified had access to affordable financing.

Rates hit record lows of 2.65% in early January 2021. They began steadily rising as the Federal Reserve realized that low rates were supporting a quick run up in home prices that contributed to high inflation. However, it’s important to understand these things together because it shows how mortgage rates can cycle.

When Is The Best Time To Get A Mortgage?

Rates may play a large role in your decision on when to get a mortgage, but it’s certainly not the only factor. People often make the decision to buy a home when they get married, have kids or just need to find a place of their own. You might choose to refinance in order to get some work done on your home, shore up your retirement funds or consolidate debt.

It’s also important to note that you’re not necessarily wedded to the rate forever. If you buy a home today, it may be to your advantage if there’s less competition in your market due to higher rates. You can then refinance down the line to get a lower monthly payment if and when interest rates fall.

Additionally, those who lock their rate on a purchase between now and the end of February are able to refinance with reduced closing costs if rates fall between 120 days and 3 years after they close on their initial loan.²

Where Will Interest Rates Be In 2023 And Beyond?

Anyone who tells you they have any idea where mortgage rates are headed with absolute certainty and be proven right should be your source to consult before making any major life decision. That person would be nice to know. The disappointing truth is that they just don’t exist.

Mortgage rates can be especially hard to predict because there are a variety of economic and political events that can take place both in the U.S. and abroad that can throw interest rates in one direction or another at a moment’s notice.

It can be argued that they are even harder to predict this year because the housing and mortgage markets have undergone incredible changes throughout 2022. The outlook is always harder to see when there’s been significant movement from the status quo.

The predictions for the 30-year fixed interest rate vary widely among major players in the industry. And it’s their job to predict these things.

Historical Mortgage Rates FAQs

We’ve gone through a baseline of things we can learn from historical mortgage rates. Now let’s answer a few of your frequently asked questions.

Should I get an adjustable- or fixed-rate mortgage?

Every situation is different, but there are many scenarios in which an adjustable-rate mortgage (ARM) could make more sense than a fixed-rate mortgage. ARMs have initial rates that are lower than fixed mortgages with similar terms because bond market investors don’t have to try to project out inflation for 30 years if the rate can adjust. This initial lower rate typically lasts 5, 7 or 10 years.

If it’s a starter home and you plan to move out before the rate would adjust, so you can benefit from the payment savings. If you qualify, you might refinance into a fixed rate before the rate adjusts as well. Finally, some people take the money they are saving on the payment with the initial rate and put it toward the mortgage balance so the payment is lower after adjustment.

What is the lowest mortgage rate in history?

The lowest average interest rate ever recorded for a 30-year fixed mortgage in the PMMS was 2.65% on January 7, 2021.

What is the highest home interest rate in history?

Conversely, the highest recorded 30-year fixed mortgage rate was 18.63% on October 9, 1981.

The Bottom Line

While mortgage rates are no longer at historical lows, they’re nowhere near the highest they’ve ever been either. Rates are very cyclical in nature. It’s very difficult to try to time the market or guess where it’s going next, so the time to get a mortgage is when it makes the most sense for your lifestyle and financial situation. After all, you might be able to refinance if rates fall later on.

While you can’t control where the bond market is headed, you can make sure your personal qualifications look good by saving up for a down payment and working on your credit. If you think you’re ready to get started, you can apply online today for an initial approval.