A perspective on mortgage interest
Last week brought another moderate increase in 30-year mortgage interest rates but with the average rate still below 4.5 percent there seems to be little cause for alarm. Still, with many remembering the lowest of the low at 3.35 percent in November 2012, rates over 4 percent may seem high at 4.2. Those of us who purchased homes in the early '80s will agree that, by comparison, these rates seem ridiculously low. Even so, Americans have not always enjoyed fixed rate loans.
In 1934 FDR's New Deal established the Federal Housing Admin-istration (FHA) under the National Housing Act which facilitated the 30-year loan. Prior to the introduction of the 30-year mortgage, U.S. homeowners were at the mercy of adjustable interest rates and balloon-payment mortgages. With these older mortgages, after making payments on the loan at a fixed rate for a certain period, the borrower would be liable for the repayment of a "balloon" amount representing the remainder of the loan. Before Roosevelt's innovation, mortgage owners could also be subject to the lender calling in the loan, meaning the lender could demand an immediate payment of the full amount still owed.
The 30-year mortgage, or fully amortized loan would change the banking industry forever. In addition to allowing far more people to afford homes, the FHA introduced the principle of an expiration date or, term, into banking products. The concept of term, providing for loan repayment that would amortize the principle and interest over the life of the amount owed, was eventually applied to other types of bank loans.
The Federal Housing Administration brought long-term stability to the American housing market and helped to stimulate economic recovery in the United States in the wake of the Great Depression just as low home loan rates today are helping the economic recovery. Rates are still kept low with intervention in part from the Federal Reserve, a non-governmental agency, to affect the whole economy in a positive way. More homebuyers mean more homes which means more jobs and leads to greater spending which leads to more taxes which leads to a better economy, for government and for its citizens.
Current rates are still lower than those seen as recently as April and these low rates have again led to a surge of new mortgages after a several weeks lull in mortgage applications. According the the Mortgage Bankers Association loan applications jumped in the week ending June 6. "Applications for re-financings rose 11 percent last week while applications for home purchases, a leading indicator of future home sales, rose 9.3 percent," the MBA reports.
Looking back 40 years we see that interest rates on a 30-year loan averaged 9.09 percent in June 1974. By November 1978 they had reached double digits up to a high of 18.5 percent. Those with less than perfect credit would pay higher. Rates would remain in double digit territory until October 1986 when they dropped back to 9.98 percent falling as low as 9.04 percent in March 1987 where they began to climb again. In October 1993, rates dropped to another, now new, low of just 6.83 percent. 5.23 percent became the new historic low in June 2003.
In November 2012 a new low of 3.35 established the all-time record for lowest interest rates. Knowing the history then, should relieve any angst now felt by first-time buyers who fear they have missed the last decent rate. Except for a few months, there has not been a better time in 40 years to buy a home with a 30-year loan.
Trust an expert....call a Realtor. Call your Realtor or visit www.cdarealtors.com to search properties on the Multiple Listing Service or to find a Realtor member who will represent your best interests.
Kim Cooper is a real estate broker and the spokesman for the Coeur d'Alene Association of Realtors. Kim and the association invite your feedback and input for this column. You may contact them by writing to the Coeur d'Alene Association of Realtors, 409 W. Neider, Coeur d'Alene, ID 83815 or by calling (208) 667-0664.