What is a normal mortgage rate?

Posted by  on Jul 16, 2014

Q: Mortgage rates seem to change so much. How can I tell what a normal mortgage rate is? My point is, how do I know whether I'm getting a good deal if I don't know what a normal rate should be?

A: In economics, "normal" is something of a moving target. Still, you can get some perspective on mortgage rates if you consider three things:

  1. Historical norms. History never repeats itself in an exact, orderly pattern, but it can be a guide to what types of conditions are possible. In the case of 30-year fixed mortgage rates, Federal Reserve Bank figures show that, over time, these have been as low as 3.35 percent and as high as 18.45 percent, while averaging 8.51 percent over the long haul. So, from a historical perspective, today's mortgage rates are much closer to the low end of the range than the high end, and are well below the long-term average.
  2. Inflation. Inflation has a strong influence on interest rates, and unusually mild inflation has been a key factor in allowing the low mortgage rates you have seen in recent years. Over the past 12 months, inflation was 2.1 percent. This is still well below today's mortgage rates, but be vigilant -- the inflation rate accelerated for three consecutive months though May 2014.
  3. Competitive environment. Aside frominflation, there are a great many economic factors which influence mortgage rates, and something changes nearly every day. It is difficult to pinpoint what impact these changes should have on mortgage rates, but mortgage lending is a very competitive business. Under any set of circumstances, "normal" is what the market says it is; and by comparing quotes from different mortgage lenders, you can get a feel for what today's market is saying.

The bottom line is that today's mortgage rates are unusually low. That's a good start, but only by comparing different mortgage quotes can you make sure you get the most competitive rate today's environment has to offer.

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