3 Lies You’ve Been Heard About Mortgage Interest Rates

Since I started The Exciting World of Real Estate(™) in 1998, I’ve looked at a few things when it comes to mortgage interest rates. After working with buyers for 10 years, I realized there was a lot people didn’t understand about how it all worked.

There are many serious misconceptions about getting your mortgage interest rate straight. In no particular order, here are my three most serious mortgage interest misconceptions and truths.

1. All banks offer the same interest rates.

Have you ever searched for “30 year fixed mortgage rate”? If so, you probably have a mortgage rates page. Here you can check the mortgage interest rates of banks near you, and note that these rates are not always the same. This is because there is no universal interest rate for all mortgages. And the federal funds rate does not control the interest rates banks charge (though it can influence them).

Banks charge you based on how much you pay to borrow money. It’s really simple. If you’re looking for a new home loan or refinance, contact several mortgage lenders to get the best interest rate possible.

2. Interest rates are really high

I know this will sound like absolute heresy, but interest rates are ~ no It’s really high. I know. It’s much higher than in the past few years. But in the grand scheme of interest rates, this is actually a pretty average interest rate that we’re seeing right now.

According to the Federal Reserve Bank of St. Louis, the average interest rate for a 30-year fixed mortgage was 6.94% as of the end of February 2024. A year ago, based on St. Louis Fed data, the same figure was 6.73%. Of course, the big problem is that just two years ago it was 3.85%.

Even two years ago, low interest rates were unusual. It was an anomaly that lasted much longer than expected, but it was still an anomaly. I looked at mortgage interest rates over time to provide some perspective on this story. What I learned is that the average interest rate from April 2, 1971 to February 29, 2024 was 7.73%, which is much higher than the average interest rate today.

If you’re old enough to remember the Great Recession, you’ll remember that interest rates were very different before then. Between 1971 and that difficult period, interest rates averaged 9.21%, according to FRED data. But for a long time after that, they stayed pretty low in the hope that it would reset various things in the economy. Because the boy was such a big downer. And this brings the average interest rate between the Great Recession and February 29, 2024 to 4.42%, which seems very bad for interest rates to be in the 7% range.

It was roughly a 15-year period, compared to the 50 years of data we have. I’m not at all saying that housing affordability isn’t a problem, but the problem isn’t really the interest rates. There’s a lot more here.

3. You can refinance at any time

This is a blatant lie that well-meaning people constantly tell. It is true that you can sometimes refinance your mortgage. But if I say I can do it always Mortgage refinancing assumes several important things. First of all, your life can’t really change the moment you get closer to needing to refinance. If you change jobs, take a pay cut, your spouse’s income decreases, or have other lifestyle changes, you may not be eligible for a refinance.

Second, it may not make financial sense to refinance, even if possible. Not only will you typically have to pay closing costs again (although refinancing costs less than buying), your interest rate will also be reset. What does that mean? Well, with the mortgage loan amortization method, you end up paying most of the loan interest upfront.

Let’s say you bought a house today with a $300,000 loan at 7.16% interest. The first simple principal and interest payment in April 2024 will total $2,028. The payment amount is $238 in principal and $1,790 in interest. In April 2029, five years after the first payment, the payment will be the same, but the principal will be $340.44 and the interest will be $1,687.80.

During the first five years of ownership, you paid $17,468 in principal and $106,255 in interest. If you repay the note as-is, you will pay a total of $430,169 in interest. But when you refinance, it starts all over again. $100,000 in interest you paid? It’s gone. pop. So if you refinance, you’ll need to keep your interest rate below about 5.4% to break even, excluding what you’ll pay in closing costs (usually $2,000, depending on where you live). .

Mortgage interest rates are a lie

People don’t say mortgage interest rates are bad. They are generally well-meaning people who misunderstand how this all works. But before you take your aunt’s neighbor cousin’s word for it about the biggest purchase of your life, ask a banker for the cold, hard truth.

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