Why the Latest Fed Rate Hike Might Not Change Much for Mortgage Rates That Are Already Above 6%

An image of a for sale sign is used to illustrate an article about mortgage rates. Credit: Taehoon Kim/Bloomberg via Getty Images
A sold home in North Vancouver, British Columbia, on Sept. 13, 2022. Higher interest rates are affecting housing markets worldwide. In the United States, another increase in rates by the Federal Reserve could further slow demand for homes.
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Key Takeaways

  • Mortgage rates continued to surge this week, with the average rate for a 30-year fixed rate loan hitting 6.35%.
  • Rates are at their highest level since 2008, rising in anticipation of this week’s rate hike by the Federal Reserve.
  • The Fed’s increase of 75 basis points in its benchmark rate won’t have a direct impact on mortgage rates, experts say.

The Federal Reserve ratcheted up its key interest rate Wednesday, but that might not make much of a difference for mortgage rates that are already at their highest level in more than a decade. 

The central bank opted for a third consecutive increase of 75 basis points for its benchmark short-term rate in an ongoing attempt to stifle high inflation. 

The consumer price index (CPI) was up 8.3% year-over-year in August, and while that was lower than the 8.5% seen in July and 9.1% in June, it was still higher than expected. “A lot of people thought we might have hit a peak, so the CPI was expected to be softer this time — not by much, but instead it went up,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home Loans. 

The Fed’s effect on mortgage rates isn’t direct, and experts say mortgage rates have risen in anticipation of aggressive steps taken by the Fed in raising its key rate, the federal funds rate. That rate is a short-term one that affects what banks pay when they lend each other money; when it goes up, costs for banks rise and it makes them raise costs for consumer debt. 

Rates continued to surge above 6%, hitting 6.35% this week in a survey by Bankrate, which, like NextAdvisor, is owned by Red Ventures. 

When the rate for a 30-year, fixed-rate mortgage jumped above 6% for the first time since 2008 this month, experts weren’t particularly surprised. The surge was in anticipation of the Fed’s latest hike, meaning mortgage rates have likely already baked in this change. The Fed’s official announcement is largely confirmation of what experts already knew was coming.  

Here are the average mortgage rates as of Sept. 21, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
30-Year Fixed6.35%6.12%0.23
15-Year Fixed5.43%5.30%0.13
7/1 Adjustable Rate5.18%4.87%0.31

How These Rates Are Calculated

These figures come from a weekly survey by Bankrate, which like NextAdvisor is owned by Red Ventures.

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What is the Fed Doing?  

Current levels of inflation have blown price stability out of the water. By making it more expensive to borrow money, the Fed’s goal is to bring stability by discouraging spending – a task proving to be easier said than done. Consumers’ budgets are being stretched thinner and thinner, but they haven’t stopped spending. “The only way to curb inflation is to stop the incessant spending of American consumers,” says Rueth. 

The Fed is expected to keep raising rates until inflation comes under control. “Today’s rate hike announcement confirms that the Federal Reserve is committed to raising rates until inflation goes down,” says Michele Raneri, vice president of U.S. research and consulting at TransUnion.

The danger that comes with slowing economic growth is that it could lead to a full-blown recession. Aiming instead for a soft landing, the Fed went with 75 basis points rather than a full percentage point. 

Rate hikes like today’s won’t be going anywhere soon. Until the Fed sees inflation cooling off, they will continue to raise their rate to slow consumer spending. “Inflation is absolutely in the driver’s seat, particularly as it pertains to mortgage rates. Until we get some sustained evidence that inflation is beginning to recede, the upward pressure on mortgage rates will remain,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.

Pro Tip

When the Fed hikes rates, you’ll see interest rates on savings start to go up, meaning you’ll see higher returns from your savings account or CDs

How the Fed Affects Mortgage Rates 

Homebuyers should expect mortgage rates to continue fluctuating. While today’s rate hike may already be baked into the market, “The big thing is that rates move as quickly as expectations do and with the CPI as a precedent, it wouldn’t be surprising if they move again,” says Daryl Fairweather, chief economist at Redfin, a national real estate brokerage.  

Mortgage rates are generally set based on the prices of mortgage-backed securities – bonds secured by mortgages. “Strong inflation numbers have never been good for mortgage bonds, which means the mortgage rates are going to trend higher,” says Shashank Shekhar, founder and CEO of InstaMortgage.  

By proactively accounting for the Fed’s decision, experts hope consumers can have a smoother experience, “We don’t want to create sticker shock for buyers and shut down the marketplace,” says Eileen Derks, head of mortgage at Laurel Road, an online lender owned by KeyBank that specializes in serving health care professionals.

If the Fed’s plan to tame inflation works, mortgage rates may trend down in the coming years, experts say.

High Mortgage Rates Are Deterring Potential Home Sellers 

Everyone across the income spectrum is grappling with what the Fed’s rate hikes mean for their personal finances – including fast-rising rates for savings accounts. But things get particularly confusing when it comes to the housing market, which has swung back from last year’s extreme sellers’ market.  

The Fed’s efforts to cool inflation are maintaining the upward pressure on mortgage rates that has caused the housing market to soften. According to the National Association of Realtors (NAR), the housing market saw its seventh consecutive month of decreased home sales in August – dropping 0.4% from July and nearly 20% from August 2021.

High mortgage rates might discourage both potential homebuyers and potential sellers. “Homeowners are going to be rate-locked into their homes and buyers might be hesitant to enter the market,” says Kushi.  

Most homeowners – 85% of those with mortgages – have an interest rate well below 6%, according to a Redfin analysis of Federal Housing Finance Agency (FHFA) data.  This could influence housing supply as some homeowners are reluctant to move “because selling their home and buying another could mean giving up their low mortgage rate,” in exchange for a higher monthly payment, according to Redfin. 

Kushi describes this phenomenon as “the golden handcuffs of low mortgage rates.”  

How Homebuyers Can Deal with High Rates

The current environment may be especially intimidating for first-time homebuyers, but that doesn’t mean it’s unrealistic to buy. “It’s always a good time to buy a home, if that’s what is important to you. It’s just about doing your research and making good informed decisions,” says Derks. 

Yes, mortgage rates are significantly higher than they were a year ago. But on the flip side, home prices are decreasing, and the market is significantly less competitive than it was a year ago.  

“If you have a job and your credit is fine, you should be able to refinance in a few years. So, there isn’t a ton you need to be worrying over when it comes to a higher interest rate,” says Shekhar.  

This level of inflation won’t last forever, just longer than any of us would like. In fact, the housing market is already beginning to balance out as it adjusts to regular rate hikes from the Fed. “Be patient, but don’t necessarily be discouraged,” says Kushi.