Did You Know: Interest Rates and Mortgage Pay Off

July 2, 2009

By Danielle Hale, Research Economist 

• From 1972 to 2008, mortgage interest rates as reported on Freddie Mac’s Primary Mortgage Market Survey ranged from a low of 5.82 percent to a high of 16.63 percent. Today’s mortgage rates—which have been between 5 and 5.5 percent—are generationally low.
• In the graph below, we see how much of a constant dollar loan is paid off over the course of its 30 year life at different mortgage rates. Because these are all 30 year loans, they are all 100 percent paid off at 30 years. In between, however, we see that the lower the mortgage rates enable a borrower to pay off a greater share of the loan much faster.
• For example, at a 5.5 percent mortgage rate, one-quarter of the loan is paid off after only 13 years. At a 7 percent rate, that does not occur until after 15 years. At a 10 percent rate, one-quarter is paid off at 18 years; at 13 percent, that happens at 20 years.
• Interest rates are essentially the price of borrowing money. When interest rates are high, the cost of borrowing is high and there is an incentive to save. When interest rates are low, the cost of borrowing is low.
• In any year most home buyers borrow money to purchase a home. In fact, 93 percent of buyers borrowed to purchase their home in 2008. For most home buyers then, low mortgage rates—a low cost of borrowing—is a great thing.

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