Mortgage rates have doubled since the start of the year, causing many home shoppers to pause buying until interest rates have cooled. But it’s tough to predict when rates will stop climbing as forecasts by housing experts are mixed largely due to economic uncertainty.
The average 30-year, fixed-rate mortgage soared from 3.22% the first week of January to a 20-year high of 7.08% in late October, according to Freddie Mac. The average 15-year fixed mortgage rate also rose to 6.36%, and the average 5/1 adjustable-rate mortgage (ARM) was 5.96%.
While some experts say they’re hopeful that interest rates won’t rise further this year, others say the increases will likely continue until inflation is under control.
The Federal Reserve began hiking its benchmark interest rate in March for a total of five times through September. It has now signaled that it plans to raise interest rates again before the end of the year during its meeting in early November.
“The Fed has reiterated its commitment to keeping the monetary tightening course, warning that consumers and businesses can expect more ‘pain’ ahead,” says George Ratiu, Realtor.com’s director of economic research. This means that rates will likely continue to undergo upward pressure in the upcoming months—or at least until inflation is moderated.
While some experts still hold out hope that mortgage rates have reached their peak, they have learned to manage expectations given the fluctuations over the past year.
“I would be surprised if [rates] would [go] up from here—but I’ve been saying that for the past couple of months, and I keep being surprised,” says Daryl Fairweather, chief economist at Redfin. “But even if rates stay at 7% for another couple of months, it’s going to really slow down the housing market.”
Here’s how other experts predict market conditions will affect the 30-year, fixed-rate mortgage in the coming months:
Americans watch mortgage rates closely, and any time rates pull back even the slightest amount, more people apply for mortgages. With rates still substantially higher than a year ago, however, applications remain stuck near the lowest level in more than two decades, according to MBA data.
While refinancing options can lead to a lower monthly payment, not all of the options yield less interest over the life of the loan. For example, refinancing from a 5% mortgage with 26 years left on it to a 4% rate, but for 30 years, will cause you to pay more than $13,000 in additional interest.
Before you start shopping around for a lender, you can find out how much you could save by using a mortgage refinancing calculator.
You’ll also want to consider how long you plan on staying in your home as the closing costs can eat up your savings if you sell shortly after refinancing. The closing costs to refinance run between 2% to 5% of the loan amount, depending on the lender. So you should plan on keeping your home long enough to cover those costs and realize the savings from refinancing at a lower rate.
Keep in mind that the rate you qualify for also depends on other factors such as your credit score, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and proof of steady income.
The average mortgage rate for a 30-year fixed is 7.01%, more than double its 3.22% level at the start of the year.
The average cost of a 15-year, fixed-rate mortgage has also surged to 6.29%, compared to 2.43% in early January.
In the current environment, ARMs might be more affordable than those with fixed rates. The average 5/1 ARM was 5.52% at the end of October.
The current average rates for mortgage refinances are:
While predicting mortgage rates for the next five years is a tall order, especially considering the unprecedented fluctuations over the past two years, one main factor that experts say will impact rates in the long term is the low level of housing inventory.
“When rates come down, we’re going to be in store for another hot housing market where there are more buyers than sellers jacking up prices because we haven’t solved the problem of there not being enough homes,” says Fairweather. “It’s still that affordability problem. That’s going to stay with us.”
As far as which direction interest rates go in the years ahead, Fairweather expects it will go down. However, the timeline for this downward trend remains uncertain.
“In every scenario, rates are going to come back down,” says Fairweather. “It’s just a matter of when.”
There are a complex set of factors that impact mortgage interest rates, including broader economic conditions, the monetary actions of the Federal Reserve (to some extent) and inflation. However, long-term mortgage rates are directly impacted by the bond market. The rate you’re offered on a mortgage will also depend on the lender you work with, its business costs and your financial profile.
Demand for mortgages can also affect rates, pushing it higher as available capital for lending tightens. Conversely, when there’s less borrower demand—as we’re seeing now due to average interest rates hovering in the 7% range—lenders might consider offering more competitive rates or other incentives to attract borrowers.
Getting an optimal rate on a home loan can save you a significant amount of money over time. Here are some tips that can help you get the best rate possible for your situation:
Read full outlook here.
Source: Forbes Advisor. "Mortgage Rates Forecast For 2022" by Robin Rothstein