Even if you don’t follow the daily fluctuations in the price of a barrel of oil, it’s hard to miss the drop in gas prices.
A year ago, the average price of a gallon of regular unleaded gas in Maryland was $2.25. Now, it’s about $1.75 a gallon. That’s a 22% drop in one year. And some analysts believe the price of gas hasn’t fallen as low as it is going to go.
According to some estimates, some parts of the country could see gas go as low as $1 a gallon later this year. We haven’t seen prices that low since 1999.
Back then, the interest rate for a new 30-year fixed mortgage ranged from about 6.8% to as high as 8%. Today, mortgage rates are under 4%. What’s the difference between then and now? The Great Recession. The Federal Reserve Bank reduced interest rates about as low as they could go to shore up the weak economy. Analysts predicted that they would start to increase interest rates this year, but the collapse of the oil market has put a damper on their plans.
Why is oil so cheap?
Several factors influence the current price of a barrel of oil.
Supply
Thanks to increased drilling in the US and other parts of the world, the global supply of oil is so high that some countries are running out of places to store it. OPEC has not cut back their production in the face of lower prices.
One reason is that they believe they can ride the lower prices out long enough to eliminate some of their competition. Another reason is that they are so dependent on oil revenue that they can’t afford not to keep producing as much oil as they can, even at lower prices. Russia and Saudi Arabia recently made a deal to freeze their production at current levels, but that isn’t expected to push oil prices much higher.
Demand
The global economy is slowing. China is a major consumer of the world’s oil, and their economy is not growing at the same rapid rate that it has been for the last several years. Increase fuel efficiency and the rise of alternate energy sources are also factors in weakened demand for oil.
What does oil have to do with interest rates?
Investors are running out of places to put their money. Many large investors are buying U.S. Treasuries, because they are a low-risk investment. But increased demand for Treasuries means that they are cheaper to buy. When Treasuries are cheap, mortgage rates tend to stay low.
Low oil prices also mean a lower inflation rate. A low inflation rate helps keep our historically low interest rates where they’re at.
What does this mean for homebuyers?
Low mortgage rates can save you hundreds of thousands of dollars over the life of your mortgage. If you took out a $400,000 mortgage today at an interest rate of 3.75%, the total cost of your mortgage, including interest payments, would be $666,886. Your monthly mortgage payment (not including taxes or insurance) would be $1,852. That same $400,000 taken out at a 6% interest rate would cost $863,353 over thirty years, with a monthly mortgage payment of $2,398. The difference over the life of the mortgage is almost $200,000. Even a minor difference in rates matters—a rate of 4% will cost you $20,000 more over 30 years.
Ready to start looking? Call Loeffler Realty.
Interest rates might never be this low again in our lifetimes. If you’re ready to start looking for your next home, use our map search, where you can filter by location, number of bedrooms, price, and more. Use our mortgage calculator to estimate your monthly payments. And when you’re ready, call us at (301) 882-8186. You’ll be happy you did.