The 30-year fixed rate averaged 6.91% to start 2025, at the latest. Freddie Mac data.
That means mortgage rates are now on par with 2001 levels, when the 30-year average reached 7.03% in January.
During that year, the thirty-year fixed yield remained essentially flat, ending 2001 at 7.07%.
This got me thinking: What if mortgage rates do nothing in 2025, like they did in 2001?
It’s definitely a possibility and something to think about and prepare for if you’re a potential home buyer (or loan originator).
2001 mortgage rates in 2025
January: 7.03%
February: 7.05%
March: 6.95%
April: 7.08%
May: 7.15%
June: 7.16%
July: 7.13%
August: 6.95%
September: 6.82%
October: 6.62%
November: 6.66%
December: 7.07%
After a really good decade for mortgage rates, the 30-year fixed rate has returned to its long-term average of about 7.75%.
It’s actually a little better than that since it’s hovering around 7% today, putting it very close to levels last seen in 2001.
If you look at that year, listed above by month, which is now an astonishing 24 years ago, the 30-year fix did very little.
It remained within a narrow range of just over 7%, fell slightly to below 7% late in the year, but was back to where it started to close the year.
What if mortgage rates do the same in 2025?
Maybe we’ll see mortgage rates sideways this year
While we keep talking about whether mortgage rates will rise or fall in 2025, no one is talking about the side matters.
There is a possibility that they can do very little and hover around current levels for the next 360 days.
If so, homebuyers will need to get used to this new normal and adapt accordingly.
Of course, home sellers will also need to get used to this new normal. This may necessitate additional and/or more aggressive price cuts as affordability remains out of reach for many.
Either way, we don’t seem to be framing the conversation around a fixed rate mortgage.
We keep thinking they will either go up or down, but maybe we should just focus on what happens if they do very little or nothing at all.
It may be time to start exploring different mortgage options beyond the 30-year fixed term.
I mentioned this in a previous post. The 30-year fixed term is not such a good deal anymore, yet it is still the default option for homebuyers today.
The problem is that we still can’t forget the toxic mortgages of the early 2000s, many of which were subprime mortgages.
Those mortgages led to the biggest housing market crash of our lifetimes, although it may not be fair to compare today’s interest rates to ARMs. Those Weapons.
There’s a compromise in a responsibly underwritten adjustable-rate mortgage.
Which offers a fixed interest rate for 5 to 7 years or more, and provides a healthy discount for a future rate adjustment.
Everyone seems to think that mortgage rates will improve somewhat soon whether it’s this year or next.
However, they continue to pay a premium for the 30-year fixed rate, which can be 1 percent higher than alternatives.
So one could argue that ARM could actually provide a solution to affordability problems and bridge the gap to something lower and more permanent.
Either way, if we consider that interest rates are at the top, near the top, or already on the way down, why do we continue to apply a 30-year fixed rate?
Mortgage rates in 2001 were very flat but declined in 2002
Now back to 2001 mortgage rates. The best way to describe them was flat. Very flat.
However, they averaged 8% in 2000, so 7% was a relative bargain.
By the following year, the percentage had dropped by another full percentage. So 8% down to 7% and then to 6%.
Then they kind of stayed in a mid-five to mid-six year range until the housing market collapsed in 2008.
There was a refinancing boom around 2003 because mortgage rates got closer to the 4% range and people were able to save a lot of money by refinancing to a higher rate and term.
Or leverage their equity through a cash-out refinance and borrow cheaply after facing much higher interest rates in the past.
And maybe that’s how things will go over the next few years as well. We may see all mortgage holders above 7% trading in their old loans at a 5% interest rate.
But if there is an expectation that interest rates will be significantly over the ceiling, it may make sense to choose a different mortgage product today, such as an ARM.
The caveat is eligible for refinancing in the future if rates decline.
There is always some risk that could make you ineligible, perhaps if your credit score is lower or you lose your job.
One of these events could jeopardize your loan application and make refinancing out of reach. Although there is an argument that loan modification can come to the rescue.
I still think interest rates will go down because if you look at mortgage interest rate spreads, they’re still pricing in a lot of prepayment risk, which means lenders don’t expect today’s loans to last very long.
But it will probably be stuck for most of 2025 before falling. Will we see another 2001 when it comes to mortgage rates? This is anyone’s guess, but it wouldn’t be possible to rule it out.
MBS investors and lenders may be happy with the current state of rates and not willing to budge too much given the uncertainty surrounding the economy. And the next administration.
So we may need to get used to it and learn to tolerate it a little longer. Or start seriously exploring alternatives like ARMs that offer a discount on non-fixed lifetime loans.
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