13-Oct-18 – Prospective home and condominium buyers should forget about shopping for Halloween pumpkins and trick-or-treat candy this month and focus on locking in a mortgage with an interest rate of less than five percent.

Freddie Mac’s Primary Mortgage Market Survey reported on October 11 that home loan interest rates have risen to their highest level in seven years.

Benchmark 30-year fixed-rate mortgages jumped 19 basis points to 4.90 percent, the highest level since the week of April 14, 2011, noted Sam Khater, Freddie Mac’s chief economist.

“Rising rates, paired with high and escalating home prices, is putting downward pressure on purchase demand,” said Khater (left). “While the monthly payment remains affordable, the primary hurdle for many borrowers today is the down payment and that is the reason home sales have decreased in many high-priced markets.”

Some findings of the recent Freddie Mac survey...

• Benchmark 30-year fixed-rate home loans shot up to an average of 4.90 percent from 4.71 percent a week earlier. A month ago, lenders were charging 4.6 percent for the same loan. A year ago at this time, 30-year fixed mortgages averaged 3.91 percent.

• Fifteen-year fixed-rate mortgages rose to an average of 4.29 percent, up from an average of 4.15 percent a week earlier. A month ago, lenders were charging 4.06 percent for the same loan. A year ago at this time, 15-year fixed mortgages averaged 3.21 percent.

This is the week to apply for a home loan

On October 11, Chicago-area lenders were charging a range of 4.785 to 4.863 percent for 30-year fixed-rate home loans, according to RateSeeker. So, borrowers who move quickly to apply for a home loan this week still could lock in a loan at less than five percent.

After the Federal Reserve Board on September 26 raised a key interest rate by 0.25 percent for the third time this year, mortgage rates surged to their highest level in more than seven years.

The Fed lifted its short-term federal funds rate to a range of 2 to 2.25 percent, the eighth hike since late 2015. The central bank plans to raise interest rates one more time in 2018, three times in 2019, and once in 2020, ultimately pushing its benchmark federal funds rate to a range of 3.25 to 3.5 percent.

If the Fed continues its current rate hike policy to manage growth and control inflation, experts say home buyers should expect to pay close to six percent for a mortgage by late 2019.

Therefore, home buyers who sit on the fence and wait another 18 months to two years could have to pay a 6.5 to 7 percent interest rate on a 30-year mortgage by 2020, experts predict.

However, President Donald Trump and some economists are worrying that the Fed’s aggressive tightening of monetary conditions could spark a sharp slowdown in growth next year.

That could force the Fed into reversing course and begin cutting interest rates in 2020.

The history of mortgage rates

Mortgage rates hit a historical rock bottom on November 21, 2012, when the 30-year fixed mortgage average sunk to 3.31 percent, Freddie Mac reported.

More than 18 years ago, in August 1999, when many of today’s Millennial borrowers were in grammar school, lenders were quoting 8.15 percent on a 30-year fixed mortgage.

However, to really appreciate today’s relatively low interest rates, housing experts say home buyers need only look at what banks and mortgage lenders where charging more than three decades ago in the early 1980s.

According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45 percent in October 1981 during the Great Recession of the 1980s. (Left) First space shuttle launch on April 12, 1981.

Rates fell below ten percent in April 1986, then bounced in the 9-10 percent range during the balance of the 1980s.

Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were relatively affordable five decades ago at 5.81 to 5.94 percent between 1963 and 1965.

In 1966 and 1967, borrowers paid an average of 6.3 to 6.4 percent. In the 1960s, rates last dipped below 6.5 percent in January 1968, when the national average hit 6.41 percent. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6 to 9 percent range.