The financial and housing crisis of 2008 and 2009 offered one benefit: Home mortgage interest rates have fallen to historically low levels. These rates make make the payment attractive for qualified buyers compared to historical levels. A comparison of historic mortgage interest rates illustrates this point.
The most common type of housing mortgage is the 30-year fixed. This mortgage has a set interest rate and principal and interest payment for 360 payments, or 30 years. Another common mortgage is the one-year adjustable rate mortgage, or ARM. The one-year ARM's interest rate and payment are each year to reflect the current short-term rates. The term of an ARM is also 30 years.
Freddie Mac provides these average rates for 30-year fixed rate mortgages from 1971 through August 2009.
The average mortgage rate from 1971 through 2008 was 8.87 per cent. The 1970s averaged 8.86 per cent, the 1980s averaged 12.7 per cent, the 1990s were 8.12 per cent and the first nine years of the 2000s averaged 6.43 per cent. The highest average fixed mortgage rate came in at 16.63 per cent in 1981. The lowest in this period was in 2003, averaging 5.83 per cent. Through the first eight months of 2009, mortgages were on a record low pace, averaging 5.08 per cent.
Freddie Mac provides the following mortgage rate history for one-year ARMs starting in 1984.
The average ARM rate from 1984 until 2008 was 6.41 per cent. The average rate for 1984 through 1989 was 9.09 per cent, the 1990s averaged 5.99 per cent; ARMs in the first nine years of the 2000s averaged 5.10 per cent. The highest rate in this time frame came in 1984, with an ARM average rate of 11.51 per cent. The lowest rate was in 2003, when ARMs averaged 3.76 per cent for the first year.
From 1984 until 2008 the average difference between the one-year ARM rate and the 30-year fixed rate was 1.85 per cent. This difference would result in an ARM payment £81 less than the fixed rate for the first year on a £65,000 mortgage. The biggest spread occurred in 1985 and 1987 with a margin of 2.38 per cent. In those years the £65,000 ARM mortgage would have had an initial payment £117 less than a fixed rate mortgage.
Adjustable rate mortgages that originated in the 1980s had lower reset rates and payments forever. Outside of a rate spike into the 7 per cent range in 2000 and a drop into the 3 per cent range in 2003, ARM rates fluctuated between 5 per cent and 6 per cent from 1992 until 2008. The 30-year fixed rate moved down steadily from 10 per cent in the early '90s and were in the 6 per cent to 7 per cent range from the mid 1990s until 2008.
In 2009, 30-year fixed mortgage rates were at historic lows, and ARM rates were basically the same as the fixed. It made little sense in this situation to select an ARM with the possibility of higher payments in the future. Historically, ARMs have started close to 2 per cent less than fixed-rate mortgages. If this kind of spread is the norm, selecting an ARM should be considered.
ARMs subject the mortgage payer to changing payments once a year. If interest rates are down, this can be a positive effect. Homeowners who chose ARMs in the 1980s and early 1990s were making much smaller payments in 2009 if they still had the same mortgage. The financial crisis of 2008 and 2009 pushed interest rates to historically low levels. A return to economic growth could result in higher interest rates, causing an increase in payments for ARM mortgage holders.
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