In Chapter 8 we discuss home buying and taking out a mortgage, and we use the techniques we developed in Chapter 3 to calculate our mortgage payments.  As we learned in those chapters, how large your mortgage payments are depends upon how much you borrow and what the interest rate on your loan is.

Today, home mortgage interest rates are about as low as they have ever been.  In fact, since the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac which is the government sponsored agency that works to encourage more mortgage lending, began tracking mortgage rates back in 1971, they have never fallen below 4% – that is until October 2011.  As CNN Money reported on October 6^th in an article “30-year Mortgage Rates Fall Below 4% for First Time,” the interest rate on 30-year fixed-rate mortgages fell to a record 3.94%.  Even more amazing was that the 15-year fixed rate mortgage fell to 3.26%.

How low are interest rates on 30-year home mortgages relative to what they have been in the past?  If you look at the figures provided in the article “Mortgage Rates Plunge Beyond Expectations” from Market Watch, you’ll see that they were around 7.7% in 1971 before climbing to above 15 percent in 1981-82, and have fallen rather steadily since then, beginning in 2011 to a bit below 5%.

What does that mean for your monthly payments?  As you can see in the Market Watch table, it means a lot.  Unfortunately, as pointed out in The Wall Street Journal article, “Mortgage Rates Fall Below 4%,” many borrowers simply can’t refinance because they either don’t have enough equity (since the value of many houses have declined) or they can’t meet the lending standards.

Discussion Questions:

1. In August 1979 the average interest rate for a 30-year fixed-rate mortgage was 11.2%, in October 2011 it was 3.94%, if you borrowed $300,000, what would your monthly mortgage payments be?
2. Do these low mortgage interest rates mean that you should refinance now?  The title of a recent Wall Street Journal article, “Refinance Now? Maybe Not,” suggests not.  What is the reason for holding off on refinancing given in that article?