Just in time for the spooky season, sky-high mortgage rates and elevated home prices are scaring off prospective homebuyers.
The average 30-year fixed mortgage rate rose to 6.73% in late September—a rate that buyers haven’t seen in more than a decade—and median home listing prices recently grew by an unlucky 13.1% over last year. As such, mortgage applications are down by about 20% from a year ago.
Mortgage experts predict rates to go even higher in October, although at a slower pace than we’ve seen in recent months. A lot depends on macroeconomic factors, namely inflation. The Consumer Price Index was up 8.3% year-over-year in August, and in response, the Federal Reserve raised its benchmark interest rate by 75 basis points—again—at its latest meeting.
The central bank also signaled it may continue raising the federal funds rate until inflation weakens substantially. “Inflation, when it comes to mortgage rates, is very much in the driver’s seat,” says Odeta Kushi, deputy chief economist for First American Financial Corp.
Here’s what housing experts have to say about October’s 30-year fixed mortgage rate trends and what you can do.
Experts Predict: What Will Happen With Mortgage Rates In October?
George Ratiu, senior economist and manager of economic research for Realtor.com
“I would not be surprised if we, in the next few weeks, get close to or hit 7%.”
Melissa Cohn, regional vice president of William Raveis Mortgage
“I would like to believe rates will stabilize at 6.5% and below. Once we start to see that inflation is being cracked and we see negative signs in the economy—jobless claims growing, retail sales dropping—perhaps the peak is behind us. Then we can hopefully look for rates to start to settle back down.”
Odeta Kushi, deputy chief economist for First American Financial Corp.
“Generally higher but at a slower pace. I would say rates will bounce around on a week-to-week basis but generally higher.”
What Is Affecting Mortgage Rates Right Now?
Mortgage rates generally drop when inflation is low and trend higher when inflation picks up. The most recent Consumer Price Index showed annual inflation at 8.3%, which was slightly less miserable from a high of 9.1% in June but still higher than expected.
In an effort to slow inflation, the Federal Reserve has raised its benchmark interest rate five times this year. The federal funds rate doesn’t directly impact the 30-year fixed mortgage rate, but it applies pressure. In this case, mortgage rates are likely heading higher—and they may continue in that direction. The central bank signaled it would continue its aggressive rate-hike campaign throughout 2023.
The Fed is “effectively saying they will have to fight harder and rates are going to have to go higher than they originally thought earlier in the year, in order to slay the inflation dragon,” says Melissa Cohn, regional vice president of William Raveis Mortgage. “As a result, that will create a drag on the economy.”
Fed Chairman Jerome Powell also noted that “we probably in the housing market have to go through a correction” before housing prices settle down.
“To me, that signaled clearly that the Fed is directly intending to impact home prices and housing affordability through its monetary policy,” says George Ratiu, senior economist and manager of economic research for Realtor.com.
Experts’ Advice for Homebuyers and Sellers
It has been a tough year for homebuyers, who are dealing with a combination of high listing prices and mortgage rates that have climbed by more than 300 basis points within nine months.
Those elevated home prices were somewhat manageable in 2020 and 2021, when interest rates were low. A person who bought a $400,000 home a year ago with a 3% interest rate, for instance, would have a principal-plus-interest payment of $1,349 per month. The exact same home today, with an interest rate of 6.5%, would have a principal-plus-interest payment of $2,023—a difference of $674.
Now, buyers “either have to settle for a less expensive home—and they’re still not that easy to find—or they basically have to postpone their purchase until prices reflect this new interest rate reality,” Ratiu says.
But there are still ways to save money in this rate environment. Here are some options.
Consider your rent payment
If you rent your home, you may have noticed rent prices increasing across the U.S. The median national asking monthly rent was $2,039 in August, up 11.1% compared to a year earlier, according to Redfin. Buying a home instead of continuing to rent provides a fixed monthly payment—so you’re not constantly adjusting your budget when the landlord calls to renew your lease. Buying could be a good option as long as you know where you want to live for the next few years.
“Consider how much higher your rent is likely to go,” Ratiu says. “If your rent is likely to go up in your market, check mortgage payments. In a lot of metro areas, a mortgage payment might be on par or in some cases a little cheaper than rent.”
Look into adjustable-rate mortgages
An adjustable-rate mortgage, or ARM, has a fixed rate for a certain amount of time, usually between three and seven years. After the fixed period ends, the rate may go up or down in regular intervals. ARM rates generally start lower than fixed rates, so it could be a good option for saving money on interest. You have the option of refinancing later when interest rates drop—assuming rates will drop. “There’s not necessarily a guarantee,” Ratiu says. “That could be a gamble.”
Pay attention to your closing costs because you’ll pay them when you buy the home and when you refinance. One way to give yourself extra flexibility is to avoid closing costs by accepting a higher interest rate in exchange for lender credits.
Shop with multiple mortgage lenders
Getting mortgage rate quotes from multiple banks and credit unions is important because “interest rates can vary dramatically between lenders,” Kushi says. “Failure to shop could be money lost.”
In a study by the Consumer Financial Protection Bureau, about half of homebuyers said they didn’t shop around when getting a mortgage. But interest rates can vary by 0.5% or more between two similarly qualified borrowers, the study found. Getting a home loan with a slightly lower rate could save you hundreds or thousands of dollars over the life of the mortgage.
When you’re shopping around, ask at least three mortgage lenders for a loan estimate. Based on factors such as your credit score, debt-to-income ratio, and down payment, the lender can estimate your interest rate, monthly mortgage payment, and closing costs.
Use these estimates to compare lenders and choose the one that can save you money. Enter the loan amount, rate, fees, and term for each offer into a mortgage calculator or use this home loan comparison tool below. You’ll be able to see a true side-by-side comparison of your potential monthly mortgage payment and how closing costs, lender fees, and interest rates play out over time with each loan offer.
Home loan comparison calculator
Compare your payment options side-by-side to see which is right for you and your financial situation.
Find the mortgage that’s best for you by comparing the cost of multiple loans over time.