All Financial Education

The Low Down on Low Interest Rates

May 14, 2015

Closeup of man counting payments for home

With the arrival of the traditional home-buying season, consumers are finding friendly interest rates on home loans. For years, consumers have heard advertising that the “time to get financing is now.” Or they’ve heard, “don’t wait, interest rates are at historic lows.” The interest rate climate during the first months of 2015 proves the advertising true.

A quick look at the history of the average interest rate on a 30-year mortgages shows rates are still very low. According to Freddie Mac, the only time since 1971 that interest rates on a 30-year mortgage were as low as the first quarter of 2015, was from the end of 2012 to the beginning of 2013.

Financial experts debate if or when higher interest rates might be on the way. For common consumers, trying to out-guess financial markets is difficult, especially when it comes to home loans.

“Finding the true bottom of the interest rate cycle is challenging. What should be most important is finding a comfortable payment that fits your budget,” said Ed Tierney, Vice President of Mortgage Lending at Idaho Central Credit Union. “Right now interest rates are near their lowest levels, and it is a great time to purchase a new home or refinance a higher-rate loan.”

Fixed-rate mortgages and variable-rate mortgages

In the mortgage world, borrowers can typically choose from programs that have a fixed interest rate or a variable interest rate. Both options have their strengths and they can appeal to first-time homebuyers or established borrowers. For example, a 30-year conventional mortgage is set up to have the same interest rate and the same payment for life of the loan. An Adjustable Rate Mortgage (ARM) has a rate that can change periodically depending on the terms of the loan.

“[Variable Rate Loans] can be very advantageous for first-time homebuyers for affordability, people who want to pay their debts off as fast as possible with less interest, and those seeking payment relief,” said Tierney. “While variable rates have not been as popular over the past few years, they still have a very important place for many first-time homebuyers or those that are not planning to stay in their homes for more than five years since they offer great rates, lower payments and can save you money,” Tierney added.

How interest rates affect a borrower’s decisions

Consumers should always be aware of the interest rate they are paying on a loan and if their credit history is affecting their interest rate. That rate will help determine what a consumer pays overall for whatever goods are financed. Possibly a more important number for home buyers to consider is the payment.

“When it comes to purchasing a home, the most important thing to consider is can you afford the payment and will it fit your monthly budget or lifestyle. The interest rate is important to this, but finding the right home and making the monthly payment for your budget are the key drivers,” Tierney said.

When to refinance your mortgage

The interest rate climate can fluctuate enough that an established homeowner considers refinancing a mortgage to take advantage of a lower interest rate. Finding the right mortgage product during a refinance is just as important as choosing the right loan when the home is originally purchased. Consumers can consider a fixed-rate mortgage or an adjustable-rate mortgage depending on their own circumstances. Those decisions should be clearly discussed with a home loan expert. As for determining the best time to refinance, “The general rule I recommend is to consider a .50% rate decrease or greater for refinancing due to closing costs and overall payment savings. Another key driver is term. Shortening term is a quicker way to save than lowering rates of interest since the amount of interest you pay over time will be much less,” Tierney advised.

Do your research

Idaho Central Credit Union has numerous resources to help borrowers make smart financial decisions. To learn more about Idaho Central home loans, use helpful calculators, contact a specialist or to apply for a home loan click here.