The historical perspective on interest rates provides a clear understanding of today’s increased purchasing power. At the end of 2018 average interest rates for a 30-year Conventional Loan hovered around 5%. As we headed into 2019 most economist believed the Federal Reserve would raise rates. What occurred in 2019 was a decline in interest rates! At the end of 2019 the average interest rates on a 30-year Conventional loan was just below 4%. Headed into 2020, the Federal Reserve policy making body seems committed to keeping interest rates low for the foreseeable future.
The Federal Reserve sites low inflation (currently at 1.6%, when stripping out food and energy) which is well below the 2% threshold they use. As long as inflation remains below 2% we should expect interest rates to remain low. Current rates on a fixed 30-year Conventional loan are hovering around 3.75%! The fact that interest rates today are at least 1% lower than they were a year ago provide for more purchasing power for consumers. For example: 5% interest rate on a $400,000.00 loan – $2147.00 (principal & interest), 4% interest rate on a $400,000.00 loan – $1910.00 (principal & interest), 4% interest rate on a $450,000.00 loan – $2148.00 (principal & interest), 3.75% interest rate on a $463,500.00 loan – $2147.00 (principal & interest)In the example above, because of the low interest rate environment we are seeing, an individual can purchase much more home for the same monthly payment compared to a year ago.
Darren Lovell, Loan Originator
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