Understanding 2012 Mortgage Rate Highs & Lows
How Should You Interpret the 2012 Mortgage Rate Highs & Lows? Read on for a Basic Look at Last Year’s Record Lows and What They Mean for Borrowers and the Economy Now.
2012 Mortgage Rate Highs & Lows
Amid all the news and noise about record 2012 mortgage rate highs and lows that hit the lowest numbers in history, and can be difficult to know exactly how and why this might be a good thing. If you’re a potential home buyer or it’s early in your mortgage and you want to refinance, the benefit of lower interest rates is obvious: lower monthly payments. But what about for everyone else? Without covering complicated economic analysis of what interest rates do to various aspects of the economy, the superficial and immediate benefits and downsides of low mortgage rates are pretty obvious. So even as they rebound and rates approach 4%, which is still incredibly low compared to the historical average, you can understand exactly what these rates mean.
Interest rates on mortgages are based on a number of other interest rates, all of which basically come back to the benchmark rate set by the Federal Reserve Bank using a variety of tools and policies. So low mortgage rates generally coincide with lower rates across the board, including those you pay if you have credit interest and those you get from your savings accounts and other small investments.
First, the obvious. Low rates are good if you want to take out a mortgage to buy a home or want to refinancing your mortgage to get either lower rates or a new bulk of cash for some other investment like a renovation. Whether you lock them in with a fixed-rate mortgage to save in the future or take advantage of the super-low resulting adjustable-rate mortgages to save money now, lower mortgage rates mean lower monthly service payments, making it more affordable to borrow money. Even as the rates climb back up, we can look at the rebound of the housing market in higher numbers of purchased homes and new constructions and see clear examples of how these lower rates were a good thing for buyers.
This recovery of the housing market offers further evidence of a way that low rates are good. In fact, helping home buyers and home owners were two of the stated goals of one of the Fed’s policies, purchasing mortgage-backed securities, that helped bring about record 2012 mortgage rate lows. They wanted to give more people the ability to buy homes, hoping this would eventually drive up demand and help slumbering home values recover ahead of the sluggish economy. So if you’re a home owner enjoying watching the value of your home go up, you may also think the low rates from 2012 a good thing. And if you find yourself in the position to take advantage of a unique window where rates remain relatively low and your home’s increasing value gives you the ability to get more cash out of your home from refinancing, then low rates probably look like a great thing.
Many experts also argue they were beneficial for banks, because they increased the volume of loans. More people could afford to take out a mortgage and buy homes with financing, leading the bank to make more loans, and thus generate more earnings from the variety of fees they charge to process home loans. And although some people might not like to think about the banks benefiting, perhaps envisioning them as sinister opportunists, it’s worth remembering that successful, reputable banks are able to make more loans, generally keeping the supply of financing high and thus ensuring that the price to borrowers remains low.
Of course, banks also lost and people with adjustable-rate mortgages and loans won in the short term while rates stayed low. Banks got and continue to receive lower mortgage payments than they may have hoped and those who got adjustable-rate mortgages in 2011 are looking pretty smart right now as they continue to save a bunch on cheaper payments. But these are relatively momentary and especially for banks are more than offset by the advantages of completing more loans.
The other big losers of low rates are people hoping to make money from interest on their savings and investments. Whereas banks can shrug off temporarily lower earnings, if your investments and savings are in forms that rely on the Fed’s rate, you may be unhappy right now. Fortunately, those same low rates offer a great opportunity to turn that money in low-paying savings into some kind of down payment to help take advantage of affordable financing for a more profitable investment like a second property.
Regardless of whether the record 2012 mortgage rate highs and lows were a good thing for you, you can see their effect on the economy and the housing market. And as these rates fade into the past, the benefits of lower rates become the downsides of higher rate, as everything reverses.
As long as you understand how lower rates are a good thing, you can put yourself in a position to take advantage of them before they completely vanish.