Why This Week’s Big Mortgage Rate Drop Below 5% Isn’t What It Seems

An image of a for sale sign in front of a home under construction. Luke Sharrett/Bloomberg via Getty Images
A "Sold" sign outside a house under construction at the Norton Commons subdivision in Louisville, Kentucky, on July 1, 2022. Mortgage rates have seen big fluctuations in the days after the Federal Reserve's latest rate hike at the end of July.
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  • The average 30-year fixed mortgage rate surveyed by Bankrate this week was 5.55%, down just slightly from last week’s average.
  • The popular Freddie Mac survey had the average 30-year fixed rate at 4.99%, but it was conducted earlier in the week, before rates climbed back to the mid-5% range.
  • That big drop in rates from Freddie Mac did not capture the latest increase, explaining the difference between the two surveys.  
  • Experts say the big daily changes in rates mean homebuyers should be sure to lock a rate when they can afford it, because rates could go up dramatically, but also be ready to ask your lender to renegotiate if they drop significantly.
  • Mortgage rates could fall below 5% again soon, but it depends on economic factors in the coming weeks, experts say. 

Two different mortgage rate surveys showed the average 30-year fixed mortgage rate dipped this week — one of them dropping below 5% for the first time since April. 

The weekly survey by Bankrate showed it down just a few points, to 5.55%. A similar one by the government-sponsored Freddie Mac showed it at 4.99%, a big drop. 

The difference has to do with timing. Freddie Mac surveyed lenders earlier in the week, capturing a big but momentary drop when rates hovered around 5%. Bankrate shows the rates as they were more recent, after that temporary blip was over. Bankrate and NextAdvisor are both owned by Red Ventures.

The big swing just in the days between last Wednesday and this Wednesday reflect an uncertain economic environment in which one expert says it’s not impossible, depending on what happens, to see rates fall below 5% again.

The rollercoaster ride came in response to the Federal Reserve’s decision at the end of July to hike its benchmark short-term interest rate. That 75-basis-point increase and other economic data pointed to signs of a possible recession and potentially a rollback in the Fed’s plans for future rate hikes, leading to a drop in bond yields, which mortgage rates tend to follow, says Shashank Shekhar, founder and CEO of InstaMortgage, a digital mortgage lender. “Most people think when the Fed rates go up, the mortgage rates follow suit, and we saw something completely different,” he says.

Hopes of a pullback from the Fed were dampened when some officials said it’s still too early to make that call, helping push rates back up, Shekhar says. 

“Mortgage rates are really moving on a day-to-day news cycle at this point in time,” he says. “That’s why we saw the rates go down initially and then the rates go up.”

The Fed hikes and other economic changes, including this year’s dramatic spike in mortgage rates, have put a strain on homebuyers, especially in a housing market with record-high prices, says Michael Pugh, president and CEO of Carver Federal Savings Bank. “That will have a significant impact on the ability of everyday working Americans to be able to purchase their first home,” he says.

What Would Make Rates Drop Below 5%?

While the average rate is around 5.5% right now, big changes – including big enough drops to put averages in the 4s – are not impossible. “I don’t rule [rates below 5%] out over the next few weeks,” Shekhar says.

It would take signs that the economy is slowing down, he says. Some of those have already appeared, including a report from the Bureau of Labor Statistics that the number of job openings dropped by 605,000 in June, with retail trade hardest hit. A cooling economy could lead to lower mortgage rates, Shekhar says. July’s jobs numbers from the BLS, which showed a nationwide gain of 528,000 jobs and the unemployment rate dropping to 3.5% (the lowest in five decades) add further complications to the current economic picture.

Lower inflation could also cause a drop in mortgage rates, Shekhar says. Gas prices have already been dropping. “All of that will have a positive impact on bonds and mortgage rates,” he says. “It’s not completely out of bounds that at this time in September we might be trending slightly lower.”

What Should Homebuyers Do About Mortgage Rates?

First and foremost, don’t try to time the market, Shekhar says. With rates moving up and down daily because of the news, you don’t want to wait to lock a rate you can afford because, when they change next, you might be paying even more. “Not to lock the rate in the hope that rates will go down is highly risky,” Shekhar says.

If you’ve locked a rate and then they drop significantly before you close on your home – by more than 25 basis points – you may be able to renegotiate with your lender for a lower rate, Shekhar says. Not all lenders will be willing to renegotiate, and most won’t explicitly tell you when you might want to, but many will allow you to do so if you ask, he says. “If you’re one of those homeowners who see that the rates fell more than 25 basis points during your purchase process, from the time you lock the rate to the time of closing, you should check with your lender to see if they have a renegotiation process,” he says.

How to Position Yourself to Buy a Home

Regardless of where mortgage rates are on a given day, you can take steps now to improve your chances of getting a better deal from your lender. The average mortgage rate is just that, an average. Some borrowers get lower rates, others, get higher rates. What you’re offered depends on a lot of factors, including your lender, your debt-to-income ratio, and your credit history. Building credit is one of the best ways to prepare yourself for homeownership, and it could save you a lot of money if it gets you a lower interest rate, Pugh says.

One way to build credit is to keep an eye on your credit card balances, Pugh says. With interest rates also rising for credit cards, carrying a lot of that high-interest debt can make things even worse for you financially. “What we know today is that with the rate hikes and increases that we’re seeing, credit card debt and spending needs to be a top priority for everyday working families and households,” he says. “You will now experience less of your payment being applied to the principal balance of what you owe on the credit card – more will be going toward interest.”

Potential homebuyers should also focus on budgeting and saving. Pugh advises that you leave some “wiggle room” in your budget, but also be consistent about saving money regularly. “Have some discipline about really making the effort to save,” he says. “You can’t afford not to, especially in this very uncertain and challenging time.”