Mortgage Rates Jumped to 3.28% — the Highest They’ve Been In 8 Months. Here’s What to Expect Following Last Week’s Fed Announcement

Mortgage rates went up again last week, coinciding with statements by Federal Reserve Chairman Jerome Powell that support what experts have predicted all year: that rates would increase as the economy recovers next year.

The average 30-year fixed mortgage rate increased by 0.04% last week reaching 3.28%. This is the second rate increase in a row and the highest rate average we’ve seen in eight months. 

The latest increase is consistent with Powell’s announcement last week that the Fed plans to to slow down its bond purchasing program since “the economy no longer needs increasing amounts of policy support.”

While experts have generally expected rates to increase throughout the year, at least one expert offered a new specific prediction last week. The 30-year fixed mortgage rate will increase to 3.5% next year, according to Lawrence Yun, chief economist and senior vice president of research for the National Association of Realtors (NAR). Yun made his prediction during the presentation of the NAR’s year-end Real Estate Forecast Summit. 

Despite expected rate increases next year, there is still the possibility that rates will drop back amid the impact of Omicron and other COVID-19 variants, Powell acknowledged last week. “The rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose risks to the outlook.” 

Here’s a look at where rates have been, where they are today, and what we can expect to see in the future. 

Mortgage Rates and the Housing Market: What to Expect 

Experts predicted we would see increasing rates and volatility in December, and that’s largely been the case. Last week’s increase of the average 30-year fixed mortgage rate from 3.24% to 3.28% reached the highest threshold in eight months.  

Officials from last Wednesday’s Federal Reserve meeting said there could be as many as three rate hikes in 2022. Even before last week’s Fed announcements, consumers expected rates to increase over the next 12 months, according to a recent Fannie Mae housing study. How fast or slow they increase is likely to depend on the health of the economy.

Growing concerns over rising inflation and the Omicron variant of COVID-19 have been pushing and pulling rates up and down. The most recent consumer price index reported the largest inflation surge in 39 years. 

Mortgage rates are likely to experience continued volatility but stay historically low, Zillow economist Nicole Bachaud told us recently. The counterbalancing factors of rising COVID cases and rising inflation will contribute to the swings we’ll see in mortgage rates going forward, said Bachaud. 

While current rates aren’t as low as the sub-3% we saw earlier this year, they are still very low from a historical perspective.  

Mortgage Rates: Historical Look Back 

The average 30-year fixed mortgage rate was around 3% one year ago. That is 0.28 percentage points lower than last week’s average. Two years ago, they were at 3.93% — significantly higher than they are today.  

The big drop in rates this year was largely a result of the economic effects of the COVID-19 pandemic and the Federal Reserve’s reactive policies in 2020. According to the U.S. Bureau of Labor Statistics (BLS), nearly 9 million workers reported losing employment in 2020. In an effort to avoid widespread foreclosures, the Federal Reserve implemented policies intended to drive down interest rates to make housing more affordable. Lower interest rates can help keep homebuying affordable and encourage homeowners to refinance to lower monthly mortgage payments.

What Rate and Housing Market Predictions Means for Borrowers

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

Homebuyers

Experts believe the housing market is starting to cool down. But with housing prices having increased over the past year, you might need a larger down payment to stay within 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.

Some experts advise delaying a home purchase until the market cools further. Others say not to time the market and buy when the time’s right for your personal situation. With the recent rate volatility in recent weeks, it’s almost impossible to time. “It’s hard to predict what rates will do in the future, much like the stock market,” John Bergquist, managing member of Lift Financial in South Jordan, Utah, told us. “We are currently near historic lows. With this in mind, I would not suggest waiting and trying to time the market.”

Whichever you decide, housing experts recommend planning ahead by:

1. Knowing how much house you can afford
2. Sticking to a home buying budget
3. Saving for a large enough down payment
4. Vetting an experienced real estate agent your comfortable with 
5. Don’t rush into a home purchase

Existing Homeowners

Now may be a good time for a refinance. Homeowners who are on the fence about refinancing may want to consider it. After the most recent Fed announcement, mortgage rates are expected to continue its upward trajectory in the long term. It may be worth crunching the numbers with a few lenders to see if you can benefit. A good rule of thumb is if you can score a new mortgage rate that is 0.75%-1% lower than your current rate, you stand to save. 

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. Cash-out refinances are gaining in popularity — increasing from 37% to 49% of total refinances in the first half of this year, according to mortgage data analytics firm Black Knight. 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.