3 Lies You've Been Told About Mortgage Interest Rates

I got my start in The Exciting World of Real Estate (™) in 1998, so I've seen a few things when it comes to mortgage interest rates. Working with buyers for 10 years made me realize that there's a lot that people don't understand about how all of this works.

There are many serious misconceptions about mortgage interest rates to set straight. In no particular order, here are my top three more egregious mortgage interest rate misconceptions -- as well as the truth.

1. All banks offer the same rates

Have you ever googled "30-year fixed mortgage interest rates"? If so, you probably got a mortgage rates page. On it, you'll find mortgage interest rates for banks near you, and you'll see that they're not always the same. This is because there's no such thing as a universal interest rate for all mortgages. And the federal funds rate doesn't control the rates banks charge (though it can influence them).

Banks charge what they charge based on what they're paying to borrow money -- it's really that simple. If you're looking for a new home loan or even a refinance, check with multiple mortgage lenders to get the best rate possible.

2. Interest rates are really high

I realize this is going to sound like absolute heresy, but interest rates are not really high. I know, I know, they're much higher than they've been the last few years, but in the grand scheme of interest rates, this is actually a pretty average rate we're looking at right now.

According to the Federal Reserve Bank of St. Louis, the average for a 30-year fixed mortgage at the end of February 2024 was 6.94%. One year ago, that same figure was 6.73%, based on St. Louis Fed data. The big problem, of course, is that two years ago, it was 3.85%.

Two years ago, lower interest rates were an anomaly. It was an anomaly that lasted much longer than it likely should have, but it was still an anomaly. I took a look at mortgage interest rates across time to give this story some perspective. What I learned was that the average interest rate between April 2, 1971 and Feb. 29, 2024 was 7.73%, well above today's average rate.

If you're old enough to remember the Great Recession, you might remember that interest rates were very different before that. The FRED data says rates averaged 9.21% between 1971 and that rough period. They were pretty low for a long time after, though, in the hopes of resetting a lot of different things in the economy, because boy was that a big tumble. And that led to average rates between the Great Recession and Feb. 29, 2024 being at 4.42%, which makes it all seem very bad that rates are in the 7% range.

That was a period of roughly 15 years, versus the 50ish years that we have data on. I'm not at all saying that home affordability isn't a problem, but the issue isn't really the interest rates. There's a lot more at play here.

3. You can always refinance

This is a bald-faced lie told constantly by well-meaning people. It's true that you can sometimes refinance your mortgage. But to say that you can always refinance your mortgage assumes a few significant things. First of all, that your life can't possibly change substantially from the moment you close to the moment you need to refinance. If you've changed jobs, taken a pay cut, lost a spouse's income, or experienced one of a lot of other lifestyle changes, you may not be able to qualify for a refinance.

Secondly, it might not make financial sense to refinance, even if you can. Not only do you usually have to pay closing costs again (though it is less expensive with a refinance than with a purchase), you're resetting your interest. What does that mean? Well, with the way mortgage loan amortization works, you end up paying most of the loan's interest upfront.

Let's say you bought your house with a $300,000 loan today, at 7.16% interest. Your first simple principal and interest payment will be a total of $2,028 in April 2024. For the payment, $238 is principal and $1,790 is interest. In April 2029, five years from your first payment, your payment remains the same, but your principal is now $340.44 and your interest is $1,687.80.

In the first five years of your ownership, you've paid $17,468 in principal and $106,255 in interest. You'll pay a total of $430,169 in interest if you pay the note off as-is. But if you refinance, all of that starts over. That $100,000 in interest you paid? It's gone. Poof. So, if you refinance, you have to have a rate that's around or below 5.4% just to break even on your interest, not including what you'll pay for closing costs (usually a couple of thousand dollars, depending on where you live).

Mortgage interest rate lies

People don't tell you mortgage interest rate lies to be mean; they're generally well-meaning people who just misunderstand how all of this works. But before you believe your aunt's neighbor's cousin when it comes to the biggest purchase of your life, ask your banker for the cold, hard truth.