Us Mortgage Rate - US Mortgage Rate - How U.S. Mortgage Rates are Set
History and Patterns
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In recent years, much attention has been given to mortgage rates in the United States. With many borrowers defaulting on their loans, the housing bubble of the first years of the 21st century underwent a resounding pop, and many home values plummeted. In the midst of this free-fall, however, many mortgage rates in the United States have slightly declined as lenders and investors have tried to stimulate the housing market.
How U.S. Mortgage Rates are Set
While the United States Federal Reserve (the Fed) raises and lowers interest rates, the rate that is changed is not the mortgage rate, but rather the interest rate that banks charge each other on overnight loans. When the Fed raises or lowers interest rates, then banks usually do the same to prime mortgage rates (the best rates available to the best customers). However, the two rates do not match exactly, and they are not equally adjusted. While the pattern is not fool-proof, the Federal rate is usually a good indicator of the general direction that U.S. mortgage rates will go. For example, the Fed might lower its rate by .5% from 3% to 2.5% and the banks might lower prime rates by .75% from 6.0% to 5.25%.
Historical U.S. Mortgage Rates
From the end of the 1940s until about 1970, the prime U.S. mortgage rates steadily rose from about 2.00% to 8.00%. After some fluctuation through the 70s, the prime rate began to skyrocket at the end of the 70s and early 80s, reaching a record high of 20.5% in July 1981. Rates steadily declined in the mid-80s, getting as low as 7.75% by April 1987. Although rates moved up and down through the late 80s and early 90s, they were typically somewhere between 8.0% and 10.0% until the turn of the millennium, when they began to decline again. Following the housing crisis that began in 2007-08, they reached their lowest point since the early 1950s, dropping below 4.0% in early 2010.
Different Types of U.S. Mortgage Rates
Generally speaking, there are two broad categories for mortgage loans and mortgage rates: fixed rated and adjustable rate. Fixed rate loans are typically for terms of either 30 years or 15 years (although this can vary). Economists usually recommend these types of loans because of their stability over the long-term. Almost always, the shorter the term of the loan, the lower the interest rate will be on that loan.
Adjustable rate mortgages (ARMs) are mortgages that have a low initial rate that typically increases after a fixed period (called the adjustment period, often 3, 5, or 10 years). These types of mortgages often come with caps on how much the interest rate can be increased in a 6 month period, 1 year period, or lifetime. While they are advantageous for those who are planning on selling their homes or anticipate a significant increase in income (perhaps students), many have criticized these types of loans and traced the U.S. housing market bust to defaulted adjustable rate mortgages.
A third type of mortgage that is less common than fixed or adjustable rate is a hybrid of the two known as Two-Step or Premier mortgages. These loans typically have a fixed term (15 or 30 years), but have a lower rate attached to the first 7 or 10 years of the loan. These loans are a good option for people who plan to move before the lower-rate period ends.
Many of the problems associated with the current housing crisis are probably due, at least in part, to a failure of lenders to educate borrowers (and borrowers to educate themselves) about the U.S. mortgage rate. Perhaps a greater level of understanding and caution on both sides will prevent further crashes.