The Curious Case of The 30-Year Mortgage Rate

A bit over a year ago, we here at DQYDJ tried to make sense of a curious occurrence.  You see – believe it or not, there is (perhaps) a lower bound for a mortgage.  Working off the assumption that most mortgages would be refinances or finished (perhaps due to sale) within 10 years, we looked at the spread between the 10 year inflation expectations of the market and mortgage rates.  Today we consider a 30 year mortgage and look at the whole thing.

When we last approached this subject, the average 30-year mortgage rate was 4.07%.  Now?  In February, 2013 the Federal Reserve’s tracking series had it at 3.53%.

Inflation Expectations, Refinances?

A 30 year mortgage is amortized over those thirty years – so the interest you pay on a mortgage is front-loaded.  To find the right mind-frame for this, you, the borrower, are paying interest on a thirty year deposit from the bank – so paying off a dollar or principle in the first month of a 3% mortgage would be like earning 3% for 30 years on that dollar (well, for your bank).  Therefore, we would expect that the 30 year inflation number is the ‘lower bound’ of possible mortgage rates, assuming no rebates or other shenanigans.  Why is that?  Well, why would a bank lend to you for 0% real return?


Look – that’s a great deal on a mortgage.  You’re looking at around 2% expected inflation over the life of your loan, and you can get a loan for around 3.25 – 3.35% on a 30 year.  Basically, you’re paying 1.35% a year for your mortgage.

The S&P 500 returned 16% last year.  I’m just saying.  (Here’s some other returns you can peruse, in convenient calculator form).

I didn’t know in the last article if it could narrow further, and we were looking at the 10 year.  (It did.)  Curiously, the spread is now lower than inflation expectations for the first time in history.  Where do you think it goes from here?


  1. says

    I expect the bond market to collapse and mortgage rates to shoot up as interest rates sky rocket over the next few years. The Dow already bounced back… it’s about to be raise the rates time.

    • says

      I’m guessing all of your mortgages are fixed? I could certainly see it – and it would be quite a handout to people who refinanced/bought over the last 4 years. Assuming, of course, home prices didn’t tank again.

      • says

        The only fixed mortgage I have is on my primary residence. However, I don’t consider that an investment, so if houses tank again.. I’m good. I purchased to live it. Now, the beauty about income producing properties.. the valuation are calculated differently from a home you’re going to live in. You take into consideration possible rent received and expenses to determine your valuation.. so, even if the bank thinks the property is worth 10k from a previous 50k, it’s no way in hell an investor is going to sell that property.. why? well rents aren’t going to go down.. nope not one f’n penny. Just like appreciation does not affect what I can get for rent. Fyi.. my rental properties are 4.75 max 6% (2% increments) interest only with a 12 year term. I bring in enough money to cover them via rent received… say shit hit the fan.. I could float my operation with personal money.

        • freeby50 says

          “well rents aren’t going to go down”

          People used to say that about housing prices. I don’t mean to be too cynical but you never know. I certainly hope rents don’t drop like real estate did in general and its different enough mechanism that they shouldn’t plummet swiftly, but I wouldn’t say rents are immune from drops. Local problems could provide bigger risk for rentals, say for example that the largest employer in town goes bankrupt or your local economy stagnates for some unforeseen reason? Nowadays my dad has trouble collecting rents in his city due to the poor economy there. Again I don’t mean to be too cynical and I expect that rents won’t just drop in general so you’re quite likely right that the rent won’t go down. But never say never.

          • says

            Rent in the area I invest doesn’t go down.. 70% of the people in the city I invest in are renters… a good chunk of that is people who make less than 25K (30%) or 15K (70%) and require government support. I’m fairly confident. When the boom was here.. rent didn’t move.. when the bottom fell out rent didn’t move. I must say, I can only speak for the area I invest in rental properties

          • freeby50 says

            Its a safer bet that your rents won’t ddrop. But again ‘never say never’. What if 10 or 20 years from now that government support goes away?…

          • freeby50 says

            Yeah theres that. But on the positive side even if we have some sort of economic catastrophe people will always need somewhere to live so owning rentals gives a virtual guaranteed income source (assuming you’re not too leveraged). Housing is a necessity and you can bank on that.

          • says

            I don’t see Government support disappearing from the rental market – even if it eventually takes different form (I, for one, am a NIT fan). Still, a place may become so undesirable (again, I’m thinking Detroit) that all the support the US can muster won’t matter for demand.

            You can certainly defend against that by not concentrating all your purchases in one city, though (or one region).

        • says

          I know you’ve got stability on the rent because of the property you buy, but if it does look like instability is incoming… promise you’ll be careful? I’m thinking ‘Detroit’ here, although that’s obviously one of the more extreme examples, and you likely won’t have to deal with that.

          • says

            PK great point.. but what I fear the most is Real estate taxes, insurance, water bills and repairs. Even if I paid my homes off 100% I would still face 1500 in real estate taxes per property, 400 in water bills, 600 in insurance and 30% of my net going to repairs. Mortgage rates are the last thing on the list…

    • freeby50 says

      I wouldn’t use the words ‘sky rocket’ or ‘collapse’. But yes sooner or later the interest rates will go back up and the bond market will suffer from it. The fed will probably be smart enough to ease rates up gradually rather than jack them up all the sudden so that should help make the impact more gradual.

  2. Jose says

    The interest rates can’t stay at these lows forever. Anyone in a home with a mortgage should be trying to lock in a low rate if they intend on staying there for more than 5 years. Your graph also woke up painful memories of me considering a my first home purchase in the early eighties. I pretty much resigned myself to being a renter for the rest of my life!

    • says

      Yeah, this is a game change, and obviously helped along by Fed policies (which are distorting other areas of the market as well). Still, a 5/1 or one of the more exotic mortgages makes sense when they have the interest caps… I’m just looking fixed for now, though.

  3. Brick By Brick Investing says

    I believe the bond market is going to collapse and when everyone is running for the exits I will be pouring every penny I can find into municipal bonds =)

    • says

      SWCAX is where I park some money when I know I’ll be spending it on renovations (or something similar) in the near future. Tax Free Munis are an incredible deal in CA, haha.