Mortgage Rates Fell to 3.71% — the First Drop This Year. Here’s What’s Next Amid COVID, Surging Inflation

A photo to accompany a story about this week's mortgage rates Wang Ying/Xinhua via Getty
Potential homebuyers walk into a house for sale in Floral Park, New York, in 2020. Homebuyers have been experiencing bidding wars, rising home prices, and surging inflation since the start of the COVID-19 pandemic.
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After two weeks of big jumps, mortgage rates dropped last week for the first time this year, with the average 30-year fixed mortgage rate clocking in at 3.71%.

That’s a small decline, just four basis points, from a 3.75% figure the week prior that was the highest since March 2020.

Despite the drop, rates are still up quite a bit from below 3.3% at the end of 2021. They remain lower than pre-pandemic levels, meaning consumers can still get good deals on a new mortgage or a refinance.

A lot of different factors have played a role in the recent changes to mortgage rates, including inflation, the Omicron variant of COVID, and market expectations around when the Federal Reserve will start to raise its key interest rate. The Fed offered some guidance on that front Wednesday, indicating that it will likely raise rates from their current near-zero level in March, but that they will respond to changing economic conditions. “The economy no longer needs sustained high levels of monetary policy support,” Fed Chairman Jerome Powell said.

Inflation, which was at 7% in December — the highest in 40 years — is emerging as a top priority for the Federal Reserve. Powell said Wednesday the Fed is keeping an eye on the risks of higher inflation and of the effect COVID and supply chain issues are having on the economy as a whole. 

All of those issues, plus the potential for conflict in Ukraine, make it difficult to predict where rates will go, says Dr. Vivek Sah, director of the Lied Center for Real Estate at the University of Nevada, Las Vegas. “I think in the next few months, up until March, we will see a lot of volatility in these rates.”

Rates may hover around the current figures for a couple of months, Sah says, with rises and drops largely balancing each other out. Lenders may be wary of the rate hitting 4%, which is “a huge psychological number” that might scare away borrowers, he said.

The Fed’s guidance on future rate increases could calm markets and limit the kind of volatility seen in January, Sah says. “The last month or so there’s been a lot of negative news of rates going up and this might be a respite for the markets for the time being.”

ABOUT THE LATEST MORTGAGE RATES

Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.

2022 Mortgage Rates and the Housing Market: What to Expect

Rates have already jumped faster than experts initially predicted they would for the year. Experts told us late last year that they expected them to reach 3.6% to 4% by the end of the year, with COVID and inflation making interest rates volatile.

Uncertainty around COVID, inflation, and Federal Reserve moves can cloud predictions of what will happen next with the market, Daryl Fairweather, chief economist at Redfin, told us in December. 

By the end of the year, rates could stay relatively low by historic standards, Len Kiefer, deputy chief economist for Freddie Mac told us. Higher rates could slow the growth in home prices, he said.

Housing demand is expected to stay pretty stable in 2022, with some moderation as mortgage rates go up, Freddie Mac predicted in its quarterly forecast of the market. While demand should stay pretty stable, the rate at which home prices increase should slow down in 2022 and 2023.

The Highs and Lows of the Average 30-Year Fixed Mortgage Rate

Here’s a look at how current mortgage rates compare to where they’ve been over the last few years, along with inflation rate and national home price for each year. 

2019202020212022 (through Jan. 27)
Highest 30-year Fixed Mortgage Rate4.05%3.88%3.34%3.75%
Lowest 30-year Fixed Mortgage Rate3.74%2.95%2.93%3.4%
Inflation Rate2.3%1.4%7%N/A
National Average Home Price$271,900$296,700$353,900*N/A
*As of November 2021, NAR data

It’s important to look at today’s 30-year fixed mortgage rates in a broader context than just the last two years. Last week’s new average rate of 3.71% seems high compared to the 2.93% we saw in early January 2021. But 3.71% is still lower than the lowest average rate recorded in 2019.

What Other Mortgage Industry Data Is Saying 

Little change happened in the latest Freddie Mac survey, an average followed by industry experts. The 30-year mortgage rate was 3.55%, down just a single basis point from the previous week’s 3.56%. 

Freddie Mac is a government-sponsored organization that buys home loans on the secondary market. Its survey methodology and the time period in which it collects data each week differs from others, such as the Bankrate survey referenced throughout this article. While different mortgage rate averages will show slight variation, they do present similar trends over time.

What the Latest Mortgage Rates Mean for Borrowers 

Here is what future housing market speculation and forecasted rising rates means for potential borrowers.  

Existing Homeowners:

  1. Despite rates being a bit higher than they were a few weeks ago, it still might make sense to refinance your loan if you’re in certain situations. The time before the pandemic may seem like ancient history, but only a few years ago rates were close to or above 4%, and if yours is much higher than that mark, a refinance could still save you money. Refinancing makes the most sense if you can score a new interest rate close to  0.75% below your current one.
  1. Homeowners who are on the fence about refinancing may want to consider it. Mortgage rates are expected to continue their upward trajectory in the long term, so it may be worth crunching the numbers with a few lenders to see if you can benefit. 
  1. A rate and term refinance could go a long way in reducing not only your monthly payments but also the amount of interest paid over the life of the loan. With home values across the country having increased over the past year, you could also take advantage of the increased equity in your home by doing a cash-out refinance. A cash-out refi can be a useful tool to help pay off high-interest debt, pay for college expenses, or fund a home improvement project

New Homebuyers

  1. Save for a down payment of at least 10%, but ideally 20%. With housing prices having increased over the past year, you might need a larger down payment to stay within an affordable range. While a low mortgage rate can help offset down payment expenses, a large home loan can overshadow the potential savings from a low mortgage rate.
  1. Most experts advise you to make a home purchase when the time is right for your personal situation. If you’ve been sitting on the sidelines hoping prices will drop, you may be disappointed, Glen Brunker, president of Ally Home, recently told us. Since home price appreciation is forecasted to grow, timing the market is not a recommended strategy, he said.
  1. Rising interest rates can cut into your buying power if you’re shopping for a home, although Sah says over a 30-year mortgage, an increase of 25 basis points won’t make a huge difference. Rate increases make it even more important to create a budget for your planned home purchase. You need to know how much you can afford to spend on a house and make your choice from there. 
  1. Be careful not to rush a home purchase because of fear of interest rates. While they might go up a bit this year, they still aren’t expected to get too high – 4% might seem high until you look at the double-digit rates of the 1980s. A home is a big, long-term purchase, and you shouldn’t base that decision just on trying to save a few dollars a month in interest.
  1. Plan Ahead: