For those of us old enough to remember the 1980s with the big hair, leisure suits, shoulder pads, disco, one tragic memory lingers: historically high, out of control, interest rates.
In 1981, mortgage interest rates rose to nearly 18 percent. I was selling commercial real estate at that time when sales became few and far between. Financial markets were stifled while inflation went unchecked. But, by the end of the decade, yearly inflation adjusted to a healthier to 3.5 percent, which caused mortgage rates to fall to around 10 percent. This trend continued throughout the 1990s with rates holding at 6.5 percent and today we can confidently report that current mortgage rates fall into the range of 4.25 percent to 4.5 percent. Historically, these rates are beautiful and most homeowners are very pleased.
The U.S. Census Bureau reports that more than 60 percent of homeowners with mortgages are paying interest rates between 3.50 percent and 7.84 percent. If you were shopping for a home last fall, you may have noticed and possibly enjoyed a dip in rates. And the good news is that the dip has continued into 2019. We in the mortgage world are enjoying these favorable rates and for the consumer, the state of our current economy provides hope and encouragement that home interest rates will remain in this favorable range.
So, with current rates no longer being a hindrance to purchasing a home, another decision faces the potential home buyer: 30-year fixed-rate mortgage or a 15-year mortgate? Which will benefit your particular circumstances? Which can you afford? Which is better?
Historically, homeowners have preferred the 30-year mortgage term because it allows for lower monthly payments then the 15-year fixed mortgage. However, the interest costs on a 30-year mortgage are substantially more expensive.
Attached is a chart showing the cost differential for 15- and 30-year mortgages documented in the late fall of 2018. Looking at a $250,000 loan, the bottom line is that the 30-year mortgage will cost the borrower $123,918 more.
Another option you will want to weigh before signing that loan document is whether to consider a 30-year fixed rate or an adjustable rate. The adjustable-rate mortgage (ARM) has historically carried lower baseline interest rates then the common 30-year fixed-rate mortgage. Since 2005, the interest rates for the 5-year ARM have tracked at approximately 0.71 points lower than the 30-year.
However, in contrast to the fixed-rate version, which carries the same interest rate for the entirety of the loan, the ARM rate varies with the market every year after the initial 5-year period at a fixed rate. Rates for ARMs are lower during the initial fixed period because of this potentially drastic rise in the variable period.
Those thinking of buying a home now are in a good spot at a good time. As I have said, the tried and true 30-year fixed mortgage is still attractive to most buyers, while the 15-year fixed appeals to those who want an earlier payout. And the main attraction of the ARM is to enjoy five years at a lower rate, knowing that at the end of the fixed period the home will either be sold or refinanced. Which of these is right for you?
Jim Gay was a real-estate broker for 20 years and has been a financial consultant to Fortune 500 companies. He is currently a broker/owner of the mortgage place, Inc. (505-986-9080) and can be reached at firstname.lastname@example.org.