Mortgage rates have been steadily climbing over the past few months, leaving many potential homebuyers wondering why. After hitting historic lows during the pandemic, mortgage rates have now surpassed 6% for a 30-year fixed-rate loan. This rapid rise in rates has created affordability challenges for buyers and has led to a slowdown in the previously red-hot housing market.
We will explore the key factors that are causing mortgage rates to increase so sharply in 2022. The main drivers pushing rates upward include rising inflation, the Federal Reserve’s interest rate hikes, and changes to the bond market. As the Fed acts aggressively to combat high inflation, its policies are directly impacting the costs of borrowing money. Meanwhile, increased bond yields are also putting upward pressure on mortgage rates.
What’s Behind the Rate Increases?
Mortgage interest rates tend to be closely tied to 10-year Treasury bond yields and broader economic conditions. Here are some of the main drivers contributing to surging mortgage rates:
Federal Reserve Policy: The Fed regulates monetary policy, including short-term interest rates like the federal funds rate. To combat high inflation, the Fed has been aggressively raising its benchmark rate, which influences rates on consumer loans. There have been several 0.75 percentage point hikes this year, with more expected. As the cost of borrowing goes up, lenders pass those increased costs on through higher mortgage rates.
High Inflation: Prices have been rising at the fastest pace in 40 years, with broad-based inflation across sectors including food, energy, housing, vehicles, and more. Lenders charge higher rates when inflation is high to compensate for the decreasing purchasing power of the loan amount over time. The higher the inflation, the more rates tend to rise.
Strong Housing Demand: Despite higher prices and rates, demand for homes among buyers remains strong. Low housing inventory has kept competition fierce. As long as demand outpaces supply, lenders can charge higher rates and still find willing borrowers. A cooling housing market would likely bring rates down.
Recession Fears: Investors are spooked by the potential for the Fed’s rate hikes to slow the economy too much and cause a recession. This results in stock market volatility and a flight to safe haven assets like Treasury bonds. High bond demand allows for lower yields, which guide mortgage rates lower. Uncertainty persists until inflation slows.
Global Uncertainty: Other factors like Russia’s invasion of Ukraine, slowed manufacturing and trade out of China, and currency fluctuations make investors nervous. Economic instability leads rates upward until conditions stabilize.
How High Can Mortgage Rates Go?
Mortgage interest rates fluctuate daily, recently hitting highs not seen since 2008. The average 30-year fixed rate reached well over 7% in fall 2022, up from under 3% just one year prior. Unfortunately, experts say rates could continue trending higher in the near term.
Some forecasts call for 30-year fixed rates to peak around 7.5–8% or more before plateauing and reversing lower again. However, it’s impossible to say with certainty how severe rate spikes may get. A lot depends on whether inflation pressures ease up or remain persistent at 40-year highs. Other factors, like job losses or a stock market crash, could cause rates to peak sooner.
For now, the rate environment remains volatile. Borrowers thinking about a purchase or refinance may want to lock in rates as soon as possible, as daily increases are likely in coming weeks and months. Being flexible by looking at adjustable rate mortgages or shorter loan terms can also help minimize rate risk. But no one has a crystal ball, so try not to get too caught up in the daily fluctuations. Focus on finding the most affordable option for your situation.
When Will Mortgage Rates Go Back Down?
Given the rapid run-up, many hopeful buyers are anxiously wondering when mortgage rates will reverse course. Unfortunately, economists caution that rates are expected to remain elevated compared to the last decade or so, at least for the next couple years. But there are some factors that could help rates improve:
Moderating Inflation: If inflation pressures finally start to ease as supply chain issues, the war in Ukraine, and pandemic impacts resolve, the Fed could slow its pace of rate hikes. Slower inflation would take pressure off lenders to keep pushing rates higher. But this process will take time.
Economic Growth slows As higher rates curb spending and investment, economic activity is expected to cool. That could then lead the Fed to stop or even reverse rate hikes. But no one knows exactly how long that might take. A full-on recession could accelerate the process.
Less Housing Demand: At a certain point, chronic affordability issues may price out enough would-be buyers to bring demand more in line with inventory. Less competition could give lenders an incentive to offer lower rates. But buyer demand has remained persistent so far, despite higher costs.
Stocks Rebound: If inflation improves and recession fears subside, investors may flock back to stocks, stabilizing bond yields and mortgage rates. However, ongoing market volatility related to uncertainty about the economy and global events could keep rates elevated.
While nothing is guaranteed, chances seem good that rates will come down from current highs at some point in 2023 or 2024. But the exact timing is unclear. And a return to the rock-bottom rates seen during the pandemic seems unlikely in the foreseeable future. Historical averages in the 5-7% range may be the best rate scenario in the coming years.
Strategies for Coping With Rising Rates
Because the rate environment shifts frequently, borrowers shouldn’t try to time markets perfectly or wait indefinitely for lower rates. Instead, focus on finding the best loan for your situation now. Here are some tips:
Move Quickly on Purchases or Refinances: Locking in rates rapidly lets you secure a low rate before further increases. Consult your lender about their rate lock policy and closing timeline.
Ask About discounts: Many lenders offer discounted rates for existing customers who buy down points, or meet certain credit score thresholds. Lowering the rate even a little can help.
Compare Multiple Lenders: Each lender has its own operating costs that influence rate quotes. Checking rates from several lenders ensures you get the lowest possible rate. Online services can provide quick rate comparisons.
Consider an ARM (Adjustable-Rate mortgage): If you plan to move again soon, an ARM offers lower introductory rates for the first few years before it starts adjusting. Just be mindful of rate caps and adjustments.
Get Pre-Approved: Having a pre-approval letter in hand when house hunting shows sellers you’re a serious buyer. Plus, it locks in a rate for 60–90 days, typically.
Ask About Grants or down payment assistance: For first-time homebuyers, grants and low down payment programs can help overcome affordability challenges. Non-profit groups and government agencies offer these options.
Improve Your Credit: Just a small credit score boost can mean better rate quotes. Pay down balances, dispute errors, and limit inquiries to maximize your score.
Make a Higher Down payment: The more equity you have upfront, the lower the risk you are to the lender. A 20% down payment often secures the best rates, but avoid overstretching savings.
Look at Shorter Loan Terms: The interest rate on a 15-year mortgage is typically lower than on a 30-year one. Higher monthly payments are challenging, but you save in the long term.
Get Quotes Often: Volatile markets mean endless fluctuations. If shopping over weeks or months, keep checking back for improved rate offers as conditions change.
Lock When the Rate Feels right: Trying to pinpoint the absolute lowest rate will drive you crazy. If a quote seems reasonably competitive, lock it in for peace of mind.
Conclusion:
Rising mortgage rates are stressing out homebuyers and homeowners. Factors like inflation, supply and demand, and the Federal Reserve’s policies are all contributing to increasing rates. There is no definitive end in sight for rate hikes, but economic shifts could ease the pressure at some point. As a borrower, options like refinancing quickly, looking at ARMs, and seeking out discounts may provide some relief.
FAQs:
How high could mortgage rates plausibly go?
There is no definite ceiling, but experts predict 30-year fixed rates could peak around 7.5-8% or more before easing. The last time rates were above 8% was 2008.
Will mortgage rates go back down to 3% soon like during COVID?
A return to rates around 3% is unlikely in the next couple years given high inflation. But if the economy slows significantly, rates falling below 5% is possible.
Should I wait to buy a home until rates decrease again?
That’s an option, but timings are unpredictable, and home prices could rise further too. Consider your overall readiness – delaying could mean missing out on the right home.
Are adjustable-rate mortgages a good idea right now?
ARMs do offer lower initial rates, so they may be worth considering if you plan to move again within a few years. Just be aware of the risks if rates go up sharply at adjustment time.
What credit score is needed for the very best rates?
Exact thresholds vary by lender, but credit scores above 740 will generally get you the lowest rates. Improving your score can yield big savings.
How much can I lower my rate by paying discount points?
Typically paying one point, equal to 1% of the loan amount, reduces the rate by about 0.25%. The exact amount varies based on market conditions. More points further lower rates.
Do certain down payment amounts get better rates?
Generally a 20% down payment secures the best rates by showing the lender you have “skin in the game”. But low down payment programs are still available, just at slightly higher rates.
Should I take out a cash-out refinance to tap home equity?
This lets you access equity at low rates for other uses like home renovations. But it comes with fees, resets the loan term, and rates are very high now. Proceed with caution.
What rate are people with the best credit getting today?
Top tier borrowers with FICO scores over 760 are seeing average 30-year fixed rates in the 6.5-7% range as of October 2022. Rates vary daily though.
Is there anything I can do if my rate lock period expires?
You may be able to extend the lock for a fee or restart it entirely for a worse rate. Communicate closely with your lender as closing approaches. Don’t let a lock expire.