This document discusses how the share of a mortgage that is paid off varies based on interest rates over the life of a 30-year loan. It shows that lower interest rates allow borrowers to pay off a greater share of the loan faster. For example, at a 4.25% rate, one-quarter of the loan is paid off after 12 years, while at a 10% rate it takes 18 years to reach the same point. The document also notes that 91% of home buyers in 2010 financed their purchase, so current low mortgage rates are beneficial in allowing buyers to pay down more of the loan early on.

1. Share of Mortgage Paid Off and MR
December 15, 2010
Produced by NAR Research

2. Share of Mortgage Paid Off and MR
December 15, 2010
From 1971 to 2007, mortgage interest rates as reported on Freddie Mac’s Primary Mortgage Market Survey
ranged from a low of 5.21 percent to a high of 18.63 percent. Today’s mortgage rates—which have between 4.19
and 5.21 percent in the last year and 4.19 and 4.79 percent in the last 6 months—are at record lows.
In the graph above, we see how much of a constant dollar loan is paid off over the course of its 30 year life at
different mortgage rates. Because these are all 30 year fully amortizing loans, they are all 100 percent paid off
at 30 years. In between, however, we see that the lower the mortgage rates enable a borrower to pay off a
greater share of the loan much faster. The graph below shows the same picture, zoomed into the first 20 years
so that differences are easier to see.
For example, at a 4.25 percent mortgage rate, one‐quarter of the loan is paid off after only 12 years. At a 5.5
percent mortgage rate, paying down one‐quarter takes 13 years. At a 7 percent rate, that does not occur until
after 15 years. At a 10 percent rate, one‐quarter is paid off at 18 years; at 13 percent, that happens at 20 years.
Further, at the 20‐year cut‐off, the only loan that is more than half paid off is the loan at a 4.25 percent rate.
Interest rates are essentially the price of borrowing money. When interest rates are high, the cost of
borrowing is high and there is an incentive to save. When interest rates are low, the cost of borrowing is low.
In any year most home buyers borrow money to purchase a home. In fact, according to the newly released
2010 Profile of Home Buyers and Sellers, 91 percent of buyers financed their home purchase in 2010 including
96 percent of first‐time buyers. For most home buyers then, low mortgage rates—a low cost of borrowing—
are a great thing, enabling them to pay down more of the loan in the early years of borrowing.
How long will rates stay this low? In a recent Real Estate Insights commentary, Lawrence Yun outlines the
potential direction, concluding that mortgage rates are more likely to rise than to fall much further—in fact,
we may already have reached the lowest mortgage rates.
Produced by NAR Research

3. Share of Mortgage Paid Off and MR
December 15, 2010
Produced by NAR Research