Is a 4% Mortgage Interest Rate Good in 2024?

1. Why a 4% Rate Catches Your Attention in 2024

In today's market, a 4% interest rate is starting to sound more attractive than it might have just a few years ago. For those familiar with mortgage rates in the last decade, the rates fluctuated between historical lows of around 2.65% to the highs experienced during economic turmoil. But as of 2024, the financial environment is different, with inflation, central bank policies, and economic recovery efforts pushing mortgage rates back up into the mid-4% range.

A 4% mortgage rate may not seem as exciting as rates under 3%, but it could still be considered a good deal given the current circumstances. To fully understand this, it’s important to evaluate the factors that impact mortgage rates and how they influence the market in 2024.

2. Comparing Historical Rates

To appreciate whether 4% is a good rate, we need to compare it to historical data. Let's look back at the trends over the last two decades.

• 2000s: Mortgage rates in the early 2000s hovered around 6% to 7%. This was considered normal for the time, given the market conditions.

• 2010s: After the financial crisis in 2008, mortgage rates dropped sharply, with rates as low as 3% or even below, as the Federal Reserve sought to stimulate economic growth.

• 2020-2022: Due to the COVID-19 pandemic, rates hit historical lows, with many borrowers locking in rates under 3%. It was a golden period for homebuyers looking to capitalize on cheap borrowing.

• 2023-2024: Inflation concerns and aggressive interest rate hikes by the Federal Reserve have pushed mortgage rates back up, with averages now between 4% and 5%.

Given this context, locking in a 4% interest rate in 2024 could be seen as advantageous compared to where rates could trend in the near future. If inflation persists and the Federal Reserve continues to raise rates to cool the economy, rates could easily climb to 6% or higher.

3. Breaking Down the Monthly Payments

One of the most direct ways to evaluate whether a 4% interest rate is good is by calculating how it impacts your monthly mortgage payments.

As you can see, with a $300,000 loan, a 4% rate would result in a monthly payment of $1,432. Compare that to a 5% rate, where your monthly payment would jump to $1,610, or a 6% rate where you'd be paying almost $1,800 per month. This demonstrates how even a single percentage point difference in interest rates can significantly affect your monthly finances.

4. How Much You Pay Over the Life of the Loan

Let’s extend this analysis to see how much you’ll pay in total over the life of a 30-year mortgage. Assuming the same $300,000 loan:

The difference between a 4% and a 6% interest rate over the life of the loan is more than $130,000 in extra interest paid! Even just moving from 4% to 5% adds over $64,000 to your total mortgage costs. So, locking in a 4% interest rate now could save you significant money in the long run.

5. How Does Your Credit Score Impact the Deal?

The interest rate you're offered is heavily influenced by your credit score. Here’s a rough breakdown of how your FICO score can affect mortgage rates:

• 760-850 (Excellent): You’re in the best position to secure the lowest possible rates, perhaps even dipping below 4% in certain markets.
• 700-759 (Good): A score in this range likely means you’ll be offered around 4% to 4.5%.
• 650-699 (Fair): Expect higher rates, perhaps closer to 5%.
• 600-649 (Poor): You may see rates closer to 6% or higher.

If your credit score is strong, locking in a 4% rate is a smart move. If your score is lower, working to improve your credit before taking on a mortgage could save you thousands over the life of the loan.

6. Inflation and Future Rate Projections

Inflation is one of the primary reasons mortgage rates are climbing. As the economy attempts to recover from global disruptions, central banks like the Federal Reserve have been forced to raise interest rates to prevent runaway inflation. For potential homeowners, this translates into higher mortgage rates.

However, there’s no guarantee rates will stay at 4%. They could climb higher as inflationary pressures continue, which makes locking in a 4% rate today potentially a wise decision. But what if inflation drops, and rates go down? Well, you might miss out on even lower rates, but there's always the option to refinance your mortgage in a few years if rates drop again.

7. What About Adjustable-Rate Mortgages (ARMs)?

Some buyers might consider opting for an adjustable-rate mortgage (ARM) instead of a fixed-rate loan. With an ARM, you could secure a lower initial interest rate—sometimes as low as 3.5% or less for the first 5 or 7 years. However, after that initial period, your rate can adjust, and it could climb above 4% depending on market conditions.

ARMs can be risky because they introduce uncertainty about future payments. While the initial low rate may be appealing, you could end up paying much more in the long term if rates increase after your initial fixed period. If you plan to stay in your home for a long time, a fixed 4% rate might be the safer bet.

8. The Psychological Factor: "Is Now the Right Time to Buy?"

Many potential homebuyers grapple with the question of timing. "Should I wait until rates drop further?" "What if they rise instead?" The fear of missing out on a better deal can cause indecision, but it’s important to remember that you can’t predict the future of the housing market or interest rates with certainty.

If you’ve found a home you love and a 4% mortgage fits your budget, waiting for a lower rate might not be worth the risk, especially considering rates could go higher before they go lower. Plus, as inflation continues, the cost of homes may also increase, making it harder to afford the same property in the future, even if interest rates drop slightly.

9. Other Considerations: Loan Term, Down Payment, and Property Value

Aside from interest rates, other factors like the loan term (15-year vs. 30-year), down payment size, and property value also play crucial roles in determining whether a mortgage deal is good for you. A 15-year mortgage, for example, could offer you a lower interest rate—sometimes as low as 3.5%—but would come with higher monthly payments.

If you can afford a larger down payment (20% or more), you’ll not only avoid paying Private Mortgage Insurance (PMI), but you’ll also reduce the principal loan amount, which means you'll pay less interest over the life of the loan.

In conclusion, a 4% mortgage rate in 2024 is still a solid deal, especially considering the broader economic context. While it’s not the lowest rate seen in the past few years, it offers stability and predictability in a potentially volatile financial landscape. Before making a decision, consider your personal financial situation, how long you plan to stay in the home, and the possibility of refinancing in the future.

Key Takeaways

• A 4% interest rate in 2024 is good compared to future projections but higher than pandemic-era lows.
• The difference between a 4% and 6% rate can cost you over $130,000 across a 30-year mortgage.
• Your credit score plays a major role in determining your interest rate.
• Inflation is driving rates higher, so securing a 4% rate now could save money in the long term.
• Adjustable-rate mortgages (ARMs) offer initial lower rates but come with the risk of future increases.