Mortgage Interest Rate History, and a Change for the Future

The most overlooked fact about the current economy in the U.S. is the very healthy levels we enjoy on mortgage rates. These low rates allow many homeowners to lower their overhead by refinancing. This in turn acts as an economic stimulus as more families gain disposable income. However, trouble looms because a lot of voters are chanting the ever-popular political platitude, "It's time for a change."

Today's economy is very dependent upon mortgage interest rates. Right now the interest rates are very low. This, of course, is good. Today, a 30-year mortgage can be obtained for about 6%, maybe less. At 6%, a $200,000 mortgage for 30 years would result in a monthly payment of $1,199.10.

What would happen if mortgage rates suddenly went up to 10%? Well, this same mortgage would require a monthly payment of $1,755.14. It doesn't take much imagination to see that this would have a negative effect on the overall economy. Someone requiring a $200,000 mortgage to buy a home, would need to be able pay $550 more per month to qualify for the same loan.

To the economy, this is wasted money. If a person was required to come up with $550 more per month to buy the house because the price was that much higher, it would be negated by the fact the seller would have made more money by selling the house.

If the seller happened to be an entrepreneur, this extra money would end up creating more jobs. In any event, the extra money would be put to some use in our economy, even if it were just put into a savings account. However, paying a higher price because interest rates are higher means no one gains anything. This, in itself, would cause an economic slowdown.

However, interest rates are good and have been for quite some time. So, you may ask how do these interest rates compare with other rates throughout history?

Fannie Mae and interest rate stability

In 1938, Fannie Mae was instituted. This put mortgage rates into a particular market. Before this time, mortgage rates varied wildly from lender to lender and between different areas of the country. With Fannie Mae, loans could be sold between different institutions. Having more people involved in a market tends to stabilize the price of the underlying commodity.

Back in 1938, there wasn't a lot of money around. Because of this, mortgage rates were very low, as low as even 3%. In the '40s mortgage rates stayed low in part because during wartime most of the economy was regulated and buying a house was very difficult. So, there wasn't a lot of demand for mortgage money.

The early mortgage rates

In the '50s and right up until the mid '60s mortgage rates hovered around 5% to 5.5%. This is very close to where mortgage rates are now. However, starting in 1971, mortgage rates started to increase. In fact by the late '70s, they had become out of reach. People who didn't enjoy a top credit rating were asked to pay as much as 23% for a mortgage. This of course, was devastating to the overall economy, so much so, a misery index was even created to gauge how bad consumer sentiment was.

Controlling the price of oil is not a new idea

Part of the reason interest rates were skyrocketing during the '70s, was the fact price controls were tied to oil prices. This had a very negative effect on the overall economy. It made gas unavailable to consumers and disrupted the normal American way of life.

Starting in the early '80s, Reagan-omics started interest rates falling once again. This trend, which started in about 1983, has not ended yet. The interest rates of the '90s ranged between 7% and 9%. Since about 2001, they have been between 5% and 7%. All in all, for the last 20 years we've enjoyed moderate interest rates.

Now that we're a closing in on a 50-year low for mortgage rates, it makes us wonder if this downward trend is ending and if mortgage rates will once again head upward. When I think of the possibilities, I must say I am petrified!

Is anybody for a change?

In this presidential election year, I hear many people say they're looking for a change. To me, this means interest rates being low is not what these people are looking for. Perhaps they would like interest rates at 15 to 20%. In their quest for change it would mean they would have to give up on the war against terrorism. This is a war we are winning, but change would mean they're looking to lose it.

Though the economy is no longer screaming along as it did for most of the last 23 years, the economy is not in a recession. In fact, it's not really close. But change would mean a recession. A profound change would mean a depression.

In our current economy the unemployment rate is about 5.2%. Not long ago, full employment was considered an unemployment rate of 6%. Within the last two years the unemployment rate reached an all-time low of 4.5%. However, people are looking for change. Perhaps the German-French style 13% unemployment rate is what they desire!

During the last 20 years, we've made many trade agreements with other countries. This has resulted in lower prices to consumers and lower prices to small businesses. This has been healthy for our economy because it has allowed the small businesses to expand and create. It has also allowed people to save and invest.

Those looking for change want to do away with our trade agreements with other countries. They have bought into the notion that free trade exports jobs. However, without free trade the common PC would cost about $15,000. This would be a change!

In 2003, our income tax rates were lowered. This has been very healthy for our economy. One of the changes some are looking for is to raise those income taxes again.

Worst of all, another one of the changes would be following those who want to put price controls on oil again. This would do the trick! It would indeed, mean change. Are you ready for 23% mortgage rates?

About the author: Ed Lathrop is a series 3 commodities futures broker. He has extensive knowledge of the economy in general. He has developed EzCalculator, a Mortgage Calculator that includes the famous "How to Make $100,000 on Your Mortgage" calculator. Free Financial Calculator! get as many free amortization schedule printouts as you want at: Amortization Schedule Free. These sites are not affiliated with any lender.