As the 2020 election approaches, you might wonder what kind of impact it will have on the mortgage interest rate you pay. Learn more about what factors determine the rate you get on a loan and what you can do to make sure you get the lowest rate possible when you apply for a mortgage.
When you take out a mortgage to buy a house, you become responsible for paying back the amount you borrowed, or the principal, as well as interest on the loan. The amount you pay in interest can vary depending on multiple factors. When buying a home, your personal credit history and the current economic situation can all impact interest rates on your home loan. The situation in the world around you, such as if it is an election year, might also have some effect on interest rates.
How Have Presidential Elections Affected Mortgage Rates in the Past?
Since politics and social conditions can play a role in influencing mortgage rates, it’s natural to wonder if an upcoming election will have an impact on mortgage rates. Freddie Mac began keeping track of average monthly mortgage interests for 30-year fixed-rate home loans in April of 1971. With this data, it’s possible to look at the numbers to see if there are discernable patterns or changes in interest rates during election years.
The year after Freddie Mac started tracking mortgage rate averages, 1972, was an election year. In 1972, the annual average interest rate was 7.38%, slightly lower than the average from April to December 1971, which was 7.55%. There was a slight dip in rates to 7.29% in April 1972, but otherwise, interest rates hovered around 7.4% for much of the year.
Four years later, in 1976, the average interest rate was 8.87% — not much different from the average rate of 9.05% in 1975 or 8.85% in 1977. Inflation was a big issue in the late 1970s, so by 1980, the average rate had climbed to 13.74% at 2.5 percentage points higher than it was in 1979. The next year, the rate had reached 16.63%, so it’s not clear whether the rise was due to the election or to other economic factors at play.
In 1984, the average rate was 13.88%. From then on, rates started to fall as the economy improved. By the next election year, 1988, the average interest rate on a 30-year mortgage was 10.34%. During the next four years, it continued to fall. In 1992, the average rate was 8.39%. Although rates were falling year after year, over the course of a 12-month period, there weren’t significant changes in interest rates.
The average interest rate in 1996 was 7.81%. That year, rates rose slightly from an average of 7.03% in January to 8.32% in June before dropping to 7.6% in December. In 2000, an election year with a particularly dramatic election, rates remained relatively constant, with an annual average of 8.05%. Rates showed a similar pattern in 2004, remaining relatively stable. Even in 2008, in the midst of the Great Recession, interest rates hovered between 5.29% and 6.43%, which isn’t a lot of movement.
Rates have been near record lows in the most recent election years. In 2012, the average was 3.66%. In 2016, it was 3.65%. Interest rates have dropped to record lows in 2020, but those changes are due more to the pandemic and economic concerns than the election.
What Happens to Mortgage Rates After an Election?
Does an election have an effect on mortgage rates after the fact? Just as there doesn’t seem to be much impact on rates due to a pending presidential election, the results of the vote also don’t seem to bring about much of a change. What might be more important for interest rates are other social and political factors that accompany an election year. The year 2020 has seen many fluctuations due to the pandemic, high rates of unemployment, social unrest and wildfires in certain parts of the country. If anything, these fluctuations may be more likely to affect people’s decision to buy a home or not more than who might be elected the next president.
If you are considering buying a home and are in the process of shopping for a mortgage, it may be favorable to take the loan with the best rate you are offered now, rather than wait to see what may or may not change in November.
What Are Mortgage Interest Rates?
Lenders charge interest both to make money on a loan and as a form of protection. A lender is taking a risk when it issues a mortgage. It’s giving you, the borrower, a lump sum of cash and then waiting 15, 20 or 30 years for you to pay it back. Even if you have a steady job, high income and excellent credit history when you take out the loan, there’s a risk that your situation will change and you might become unable to repay your loan. Charging interest ensures that the lender will make a least some money on the mortgage, even if a borrower ends up defaulting on the loan.
Types of Mortgage Interest Rates
When you apply for a mortgage, you can generally choose between two types of interest rates: fixed and adjustable. A fixed interest rate remains the same for the entire term of the loan. If you apply for a 30-year mortgage with a 4% interest rate, you will pay 4% in year one and in year 30. Your monthly mortgage payment will stay the same for the entire term of the loan with a fixed rate.
An adjustable-rate mortgage (ARM) has an interest rate that changes over time based on market rates. Often, the rate on an ARM is lower than the rate on a fixed-rate mortgage to make it more enticing for the borrower. The initial rate might last for a year or several years. When the initial rate expires, it resets to reflect the current market rate. Depending on circumstances, your monthly payment could rise considerably from one year to the next with an ARM, or it could drop.
The initial rate on an ARM often lasts for a period of three, five or seven years. Once that period ends, the rate might change every year or on another pre-determined schedule. Some ARMs have adjustment caps, which prevent the rate from increasing too much. For example, you might take out a loan with an ARM that has a 5/3/5 cap. The first five means that your interest rate can’t increase by more than five percentage points over the initial rate. Each time the interest rate adjusts, it can’t increase more than three points over the current rate. Over the course of the loan, the rate can’t ever be more than five points above the initial rate.
An ARM can seem appealing, as the initial rate on the loan is often lower than the rate on a mortgage with a fixed interest rate. As a borrower, it helps to think about how long you plan on living in your new home and whether you can afford an increase in your monthly mortgage payment if the interest rate goes up.
What Has an Impact on Mortgage Rates?
Whether an interest rate is adjustable or fixed is just one factor that determines what a lender might charge you when you apply for a mortgage. Multiple factors influence mortgage rates. Some of those factors are within the control of the borrower, while others are not. Factors that you can’t control include the economy and the Federal Reserve’s monetary policy.
Knowing what you can control when it comes to the rate you’re offered and understanding how the larger world affects mortgage rates can help you get the timing right when you apply for a home loan. The following are some of the factors that might affect your rate:
1. Credit History
When a lender gives you a mortgage, they are taking on a risk, which is part of the reason why you need to pay interest on the loan. A lender uses your credit history and score to assess how risky it would be to lend you money. The lower your credit score or the weaker your credit history, the more interest a lender is likely to charge. If you have a history of stellar credit and a score in the excellent range, you are more likely to get a better interest rate.
2. Down Payment Size
The size of your down payment also affects the perceived risk level of your mortgage. The more you pay upfront in comparison to the amount you borrow, the less risk there is to the lender. Putting 20% down is likely to get you a lower rate than if you were to put down 5% or 10%.
3. Loan Type and Length
The type of mortgage you get also affects your interest rate. VA loans and FHA loans often charge different interest rates compared to conventional loans. In some cases, the rates on a VA or FHA loan might be lower than the rate on a conventional loan.
How long you have to repay the mortgage influences the interest rate, too. Generally, shorter loan terms are lower risk for lenders, so the interest rate is lower.
4. Local Housing Markets
The state of the housing market in the area where you hope to buy can also affect the interest rate on your mortgage. If there is a lot of competition for houses in your area, interest rates can go up due to overall supply and demand. Lenders only have so much money to lend, so when there is a high demand for mortgages, they may increase the rates they charge.
Mortgage rates can increase as inflation increases, allowing lenders to continue to earn a profit. If you take out a loan with a monthly payment of $1,000, the $1,000 per month that you pay in five years won’t be worth as much as the $1,000 per month you pay now, as a result of inflation.
6. 10-Year Treasury Bonds
Broadly speaking, mortgage rates tend to track the rates on 10-year Treasury bonds. When rates on Treasury bonds drop, mortgage rates tend to drop. When Treasury bond rates go up, mortgage interest rates typically go up. Treasury bonds and mortgage rates are connected because investors who are considering purchasing mortgage-backed securities typically look to the rate on long-term Treasury bonds to get an idea of what they can charge.
Mortgage-backed securities can be risky for investors, so they often want to get the highest rate possible when purchasing them. The actions of investors and the fluctuations in the bond market can push mortgage rates up or down.
7. The Federal Reserve
Mortgage interest rates often seem to move in relation to the actions of the Federal Reserve, or Fed. When the Fed announces it is lowering rates, mortgage rates tend to decrease, too. The Fed’s decisions can have an effect on the yield of Treasury bonds, but not always. The Fed also issues monetary policies, such as deciding to buy or sell debt securities, which can affect interest rates on mortgages.
8. State of the Economy
When unemployment is low and gross domestic product (GDP) is high, the demand for mortgages often increases. People feel more secure, so they are more likely to buy a home. In times of economic growth, interest rates often go up. When unemployment is high and production is down, mortgage rates often drop, since people are usually more hesitant to purchase a home.
What Is the Federal Reserve?
When people talk about interest rates, one institution they often mention is the Federal Reserve. Although the Fed gets mentioned a lot in discussions of the economy and the financial state of the U.S., many people don’t know what it is or what it does. The Fed is the U.S. central banking system. Its main mission is to keep the financial system in the U.S. stable and secure. To do that, it performs four functions:
- Establishing monetary policy: The Fed aims to keep employment high and inflation low. It sets a federal funds target rate to keep inflation down. The target rate is the amount of money each bank in the U.S. needs to have deposited with one of the Fed’s 12 banks. During a recession, the Fed might lower the target rate. In the midst of a good economy, it might raise the rate to keep inflation at bay.
- Providing payments: The Fed acts as the bank of the government and is responsible for the checking account of the Treasury Department. It also controls the amount of money in circulation. When needed, it can increase the amount of currency and coins out in the world.
- Regulating banks: Banks that are part of the Federal Reserve system need to follow the rules and regulations set by the Fed to keep financial markets stable.
- Maintaining stability: In extraordinary circumstances, the Fed might take additional actions to ensure the stability of U.S. banks. For example, after September 11, 2001, the Fed gave several banks loans to keep them from going under.
The Federal Reserve dates back to 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. In the more than 100 years since its creation, the roles and responsibilities of the Fed have evolved based on the needs of the country.
Who Is on the Federal Reserve?
The Fed consists of three components: the Board of Governors, the 12 Federal Reserve Banks and the Federal Open Market Committee (FOMC).
Seven people serve on the Federal Reserve Board of Governors. The current U.S. president names each member to the board for a term of 14 years. The board members’ terms are staggered so that each president has the chance to name two new members during a four-year term. Staggering the terms helps to keep the board politically neutral. Since one term ends every two years, a president won’t have the chance to stack the board. A president who serves one four-year term can name two members, while a two-term president can name four board members.
A president might use several criteria to decide who to name to the Board of Governors. Each board member needs to come from a different Federal Reserve district. They should also somehow reflect the commercial, industrial, agricultural or financial interests of the U.S.
The FOMC consists of the seven board members and five presidents of Federal Reserve banks. The president of the Federal Reserve Bank of New York is always on the FOMC. The remaining four bank presidents can be from any of the other 11 banks. Each bank president serves a one-year term on a rotating basis. The FOMC meets eight times a year, during which it discusses the state of the economy and financial situation in the U.S. and what it can do to promote stability and sustainable growth.
Is the Federal Reserve Connected to the President?
Aside from having the current president of the U.S. name members to the Federal Reserve Board of Governors every two years, the Fed has limited connection to the president. The U.S. president cannot tell the Board of Governors what to do and shouldn’t try to influence the policy and other decisions the board makes.
Does the Fed Set Mortgage Rates?
A common misconception people have is that the Fed sets mortgage rates or defines interest rates. The Fed sets the target fund rate, which is the interest banks charge each other when they lend to each other. Many banks use the target fund rate as a benchmark when deciding their own interest rates to charge. Mortgage rates can track the rates charged by banks on other loan products, such as credit cards.
Apply for a Mortgage With Assurance Financial Today
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