Why mortgage rates may not be as high as you think (2024)

The recent rise in inflation brought mortgage rates to the highest rates in over 20 years. The current 30-year fixed rate mortgage rate is 6.88% which is more than double what rates were during most of 2020 and 2021. However, when looking at mortgage rates from a broader, historical perspective, they may not be as high as you think.

"The 30-year fixed-rate mortgage gained popularity around the 1950s. The average rate since then has hovered around 7%, which interestingly enough, is similar to what it is today," says Richard Ross, CEO of Quinn Residences, a home developer.

In some respects, today's rates could even be seen as relatively low, such as when compared to the double-digit rates of the 1980s.

"For instance, the highest 30-year mortgage rate in history was 18.63% in October 1981, which starkly contrasts the lowest of 2.65% in January 2021. For added perspective, my first home mortgage was at 13.6% in 1985, and that was an adjustable-rate mortgage," says Ross.

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Why mortgage rates may not be as high as you think

Here's why today's mortgage rates, while not ideal, may not be as bad as some buyers believe.

Compare rates now to historical mortgage rates

If you took out a $400,000 30-year fixed-rate mortgage now, your monthly payment would be $2,629.00. But if you took out the same mortgage 40 years ago at 13.5%, you would pay $4,582.00 per month.

If you go back 50 years to 1974 and took out a mortgage with a 9% interest rate, you would pay $3,218.49 per month — not quite as drastic a difference as compared to the 1980s, but still significantly more than today.

In the 1990s, historic mortgage interest rates were roughly similar to where they are today, but you might have still paid a bit more. In 1994, for example, if you took out a mortgage with a 7.5% interest rate, you'd pay nearly $170 more per month than you would now. And while mortgage rates were a little lower during much of the early 2000s, often above 5% but below 7%, they were still much higher than pandemic-era levels.

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Recency bias

Although rates might seem high now, that could be due to recency bias. Even before the pandemic, relatively low rates were largely due to economic issues, including long periods of relatively low inflation.

"Before the pandemic, they were at historically lower levels for more than 20 years due to the global economy with enhanced technologies and tremendous aggregate supplies," says Tenpao Lee, Ph.D., professor emeritus at Niagara University.

"However, the pandemic and geopolitical conflicts disrupted the global supply chains and inflation became a major issue, as the Fed had to raise interest rates eleven times in the past two years," he adds. That brought mortgage rates "beyond the imagination of many young people."

When considering the broader historical perspective, homebuyers and those looking into mortgage refinancing may need to adjust their expectations, rather than comparing rates now to where they were a few years ago.

"I absolutely think that many people are unrealistic about where mortgage rates are, given the historical context of where rates have been over the past few decades. Mortgage rates will unlikely ever again revisit the lows seen during the pandemic. People need to accept that," says Shmuel Shayowitz, president and chief lending officer at Approved Funding.

The good news is that rates could be getting lower soon, but probably not to pandemic-era levels.

"We expect that interest rates will settle in the high 5s to low 6s and remain at this level while economic conditions are stable," says Jamison Manwaring, CEO and co-founder of Neighborhood Ventures, an investment management company.

Some take an even more optimistic view of mortgage rates falling, but still not to where they were during the pandemic.

"I do believe that mortgage rates will be in the 5s within the next twelve months, and depending on where the economy goes, we might revisit mid-to-high 4s, but a 2% or 3% handle is never to return, absent a major abnormality," says Shayowitz.

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The bottom line

Although there's some expectation that home loan rates will drop soon, it could be unrealistic to think they'll return to recent lows.

For current homebuyers, while many still hope rates will fall, and that could happen this year, it's important to view mortgage rates in a broader context. Since mortgage rates aren't all that high historically, that could indicate that they won't get much lower, unless economic conditions change significantly.

And rather than waiting to see what happens with mortgage rates, some prospective buyers might prefer to act now. Predicting mortgage rates can be difficult, and you might prefer the certainty of closing on a home you love now, assuming it's within your budget at current rates, rather than waiting and taking a chance that inventory and prices could move against your favor.