Please ensure Javascript is enabled for purposes of website accessibility

Low Mortgage Rates: "I'm Kind of a Big Deal"

By Keith Gumbinger - Jun 21, 2015 at 1:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This may be the last chance you have to lock in a mortgage with a low interest rate.

According to a recent survey by, nearly 40% of respondents said they won't be buying a house this year because they can't afford it.

In a time of meager income growth (which we have experienced since the recession began), low mortgage rates have played an integral role in enhancing affordability and reinflating home prices. Why? Low rates increase the ability of a given income to afford a higher-priced home.

So instead of another article warning that "mortgage rates are going to rise later this year," we instead wanted to focus on just how significant this low-mortgage-rate environment has been to home buyers and refinancers.

Low rates: enhancing affordability
Over the last 10 years, conforming 30-year fixed mortgage rates have been as high a 6.8% and as low as 3.28%. This decline to rock-bottom levels meant that on a peak-to-trough basis, buying power improved considerably -- and remains very strong.

At the peak in 2006 (graph below), a monthly payment of $652 was enough to borrow $100,000. When mortgage rates fell to 3.48%, that same $652 would have been sufficient to borrow $145,544 -- a 45% improvement in the amount of mortgage debt that a given income could carry.

Low mortgage rates increase buying power

Low interest rates boost your buying power
As the Fed looks to return interest rates to "normal" over time, it bears noting that the interest rate associated with "normal" continues to shrink. Over the last 10 years -- a considerable time frame -- conforming 30-year fixed-rate mortgages have averaged just 5.09%. Over the last five years, conforming 30-year fixed-rate mortgages have averaged just 4.21%.

In order to demonstrate how lower interest rates have improved buying power, we calculated the monthly payment needed to cover a $100,000 loan in 2006 when the conforming 30-year fixed peaked at 6.8%. Using this monthly payment as a constant, we calculated the loan amount this figure would cover at different interest rates over time. In all cases moving forward, there has been a material improvement as these rates have remained below where we began.

Time Period

Mortgage   Rate

Monthly P&I Payment

Loan Amount This Will Carry

2006 (peak)




2012 (trough)




5-year avg.




Split: 5-10 year avg.




10-year avg.








It's not clear yet where mortgage rates will eventually land once the Fed does raise rates, but when it does, purchasing power will be crimped. So, absent stronger income growth, keeping the housing market going may be a challenge.

Income growth will be the savior
The only way to offset the rise in interest rates is with stronger income growth. Income growth can outstrip an increase in rates or even home prices. Purchasing power would also increase with income growth, and the housing market would strengthen. However, income growth has been fairly weak in the recovery to date, and this is why you'll often hear experts and pundits expressing concern about the Fed's eventual campaign to again lift interest rates.

In order just to keep up, or at least to preserve a given level of affordability, incomes will need to keep pace with interest rate increases. Failing that, the other market-based lever to preserve affordability would be declines in home prices -- something few would like to see.

As the economy recovers, the slow growth in incomes will offset rising mortgage rates somewhat, but the impact of rising rates on potential homebuyers is something that will bear watching going forward.

This article originally appeared on

You may also enjoy these financial articles:

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.