Why Mortgage Rates May Stay Flat Despite the Upcoming Fed Rate Hike

A photo to accompany a story about mortgage rates Joe Raedle/Getty Images
A 'for sale' sign hangs in front of a home in Miami. Mortgage rates remained steady this week after ups and downs the previous two months.
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The average mortgage rate was virtually unchanged this week, and experts say it could stay fairly flat if the Federal Reserve does what the market expects next week.

The average 30-year fixed rate was 5.76%, down just a single basis point from last week, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. This holding pattern comes after a volatile June and early July that saw rates moving up and down significantly. In a similar survey by the government-sponsored entity Freddie Mac, the 30-year fixed rate average ticked up by just three basis points to 5.54%.

That was precipitated by a larger-than-expected inflation rate that came days before a Federal Reserve meeting, when the Fed suddenly switched from eyeing a 50-basis-point hike in its benchmark short-term interest rate to a larger 75-point hike to address the higher inflation.

Despite a high 9.1% inflation rate in June, observers expect the Fed to stick with a 75-point hike again next week. As long as there are no surprises, experts say the mortgage market likely won’t react too significantly. “The market’s already priced in an increase,” says Peter Boomer, executive vice president at PNC Bank.

Lenders base their interest rates on what it costs them to lend the money to consumers, which is affected by inflation, says Eileen Derks, senior vice president and head of mortgage at Laurel Road, an online lender owned by KeyBank that specializes in serving health care professionals. Mortgage rates often move in anticipation of expected increases in lenders’ costs to avoid sudden sticker shock, she says.

“We may actually see things level out a little bit,” she says.

More volatility may still lie ahead for mortgage rates. “I think we’re going to be in a little bit of a rollercoaster” as the country navigates efforts to bring down inflation and avoid a recession, Boomer says.

The Fed’s move could have implications for other parts of your financial life, however: It will likely lead to increased interest rates for home equity loans and lines of credit (HELOCs), along with better yields on high-yield savings accounts and other savings tools.

What Today’s Mortgage Rates Mean for Consumers

The average mortgage rate is in the mid- to upper 5% range, but that’s just the average. Borrowers in the same place seeking similar loans might be offered widely different rates – maybe one is quoted at 5% and another at 7% – depending on their credit, Derks says. That’s why it’s important to work on your credit score. “Take care, first and foremost of your credit quality,” she says.

Borrowers might be able to get help from unexpected places. When shopping around for a mortgage lender, ask your current banks or financial institutions if they have offers for existing customers, Derks says. Associations you’re a part of, such as the American Medical Association for doctors, might also be able to provide assistance. 

Also consider your different mortgage options. More borrowers are considering adjustable-rate mortgages, both Derks and Boomer said. Those can make sense as long as you know the risks: Most ARMs have a lower interest rate for a set period at the start of the loan, maybe five, seven, or 10 years, and then the rate changes regularly after that, typically every six months or every year, depending on the market. The lower “teaser” rate might make a home more affordable, especially if you’re planning to move after a few years. You can also refinance during that period if rates drop.

“Take inventory of your personal needs,” Derks says. “How long am I going to be in this home? That’s really important. Some people say I don’t know, but especially with our cohort, doctors and dentists, they’re moving a lot.”

Pro Tip

If you aren’t planning to stay in the home more than a couple of years, you may be able to score a lower interest rate by going with an adjustable-rate mortgage. Just understand that if you don’t move or refinance by the end of the teaser period, your rate could change significantly.

How Buyers Can Navigate Higher Rates and Home Prices

Rates are higher than they have been in years, and much higher than the roughly 3.3% they were at the start of the year, but “they’re still at historical lows” when you consider rates from before the financial crisis of the 2000s, Boomer says. 

Still, buyers are seeing their ability to afford a home hurt by rapidly rising mortgage rates at the same time home prices are hitting all-time highs. Higher mortgage rates have softened some demand for homes, with home sales dropping in recent months, and that could lead to prices coming down or at least slowing their increase in many markets.

That means buyers are getting back some bargaining power they lost during the hottest years of this housing boom. One way they’re using it is to reduce their mortgage rates, Boomer says. “More people asking the seller to contribute a point or two to buy down the interest rate,” he says. “That kind of surprised me.”

The way it works is that a buyer interested in a house might be able to offer less money to buy it, but instead they offer at the asking price but ask the seller to contribute some toward mortgage points, which would give the seller a lower interest rate, Boomer says. Buyers should talk to a loan officer and see if the strategy would get them a lower monthly payment – and a lower cost to buy the house in the long run.

Whatever happens with interest rates in the coming weeks, Derks says the most important thing is to ensure you can afford the home you’re looking at. “In this environment, if rates are a little bit higher, really reflect on needs versus wants so you get into a house you can afford,” she says. “Make sure you can afford it and enjoy your life and not be living for your house.”