July 1, 2009

By Danielle Hale, Research Economist 

• From 1972 to 2008, mortgage interest rates as reported on Freddie Mac’s Primary Mortgage Market Survey ranged from a low of 5.82 percent to a high of 16.63 percent. Today’s mortgage rates—which have been between 5 and 5.5 percent—are generationally low.
• In the graph below, we see how the yearly payment for a constant dollar loan relates to the loan amount at different mortgage rates. Yearly payments are those that would pay off the loan in 30 years.
• When mortgage rates are low, the yearly payment is a much smaller share of the loan. For example, at a 5.5 percent mortgage rate, the yearly payment is not quite 7 percent of the loan amount. At a 10 percent mortgage rate, the yearly payment is more than 10 percent of the loan amount.
• Interest rates are essentially the price of borrowing money. When interest rates are high, the cost of borrowing is high and there is an incentive to save. When interest rates are low, the cost of borrowing is low. This generally encourages spending and investment.
• In any year most home buyers borrow money to purchase a home. In fact, 93 percent of buyers borrowed to purchase their home in 2008. For most home buyers then, low mortgage rates—a low cost of borrowing—is a great thing.