We are officially experiencing a recession aptly named the Great Lockdown or what some call the Great Shut Down. This is a Coronavirus caused Recession which started effecting the world economy in early 2020. With limits on international shipping and trade as well as travel, the impact was felt almost immediately and has now had some sort of trickle-down effect in almost every American household. Some were forced to work in conditions that were deemed frontline in the viral war as essential workers, some were pushed into a furlough or job-attached unemployment scenarios and sadly, others lost their employment or businesses all together. Parents have been forced to become teachers and our most vulnerable citizens have essentially been forced to segregate themselves to stay out of the reach of this illness. As we all begin to stumble out of stay-at-home orders and into a totally new world there is a bright spot in our financial world that deserves mentioning.
During the recession in the 1980’s the peak mortgage interest rate occurred in 1981 and was 18.63%. The Federal Reserve had pushed the prime interest rate to a peak of 21.5% in June 1982 to combat inflation and that moved payed off when levels fell to normal historic levels by the end of that year. By May 1983 mortgage rates for a 30-year fixed mortgage had fallen to 12.63%. While the Federal Reserve has utilized the prime rate as an inflation correction method and that activity does affect adjustable rate mortgages, the best telltale sign of what will happen in the world of fixed mortgage lending isn’t visible by watching the feds. That happens by watching the Treasury bond markets because they compete for the same investors. They are both low risk investments due to their government backing and banks usually keep interest rates on mortgages slightly higher than treasury notes and as treasury notes rise, so do interest rates.
The bright spot we need to mention…that mortgage rates continue at near record lows and now might be a really good time to purchase or refinancing a home. According to abcnews.com, “the average rate on the benchmark 30-year home loan fell to 3.23%, the lowest level since mortgage buyer Freddie Mac started tracking rates in 1971”. If a 15-year mortgage is something you’ve considered, that rate just dipped to 2.77%.
Let’s look at exactly what sort of difference this makes in a monthly mortgage payment. A 30-year fixed mortgage on a $400,000 home with an interest rate of 4.0% would be a payment of $1,910. That same loan with an interest rate of 3.23% lowers the monthly payment to $1,736. While a savings of $174 a month might not sound like a lot, the difference it can make by the end of the loan is dramatic. The total cost of the mortgage at 4.0% is just under $687,500. The mortgage with the reduced interest rate of 3.23% totals just over $625,000. The difference over the total length of the loan is $62,000. That number is 26% higher than the annual median household income of a Bozeman resident today ($46,422, bestplaces.net).
The moral of this story is that while we are all wondering what the future will look like and how this global health situation will play out, if you have resources available and are considering making a move or refinancing, now is the time to do it. Real estate in the Bozeman area continues to be a good investment and current interest rates can save you a lot of money in the long run.