Mortgage Rates Will Keep Rising In 2022, Experts Predict. Here’s How Inflation and COVID Variants Might Impact the Market

2022 Mortgage Rate Predictions Adobe
Housing experts predict that pressure from the Fed and inflation will fuel rising interest rates in 2022. But Omicron is a wildcard.
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2021 was a year of records: The average 30-year fixed mortgage rate reached its all-time record-low of 2.65%, and inflation hit a 39-year high

Now there’s only one place left for mortgage rates to go, according to experts, and that is up. In 2021, the average 30-year fixed mortgage rate rose roughly 0.5%. Most experts are predicting 2022 mortgage rates to rise a similar amount. 

The majority of economists and housing marketing analysts we talked to believe mortgage interest rates will gradually drift higher as the year progresses. But there was not a clear consensus on how much and when. The possibility of new COVID-19 variants, such as Omicron, looms as a threat to our public and economic health and could stall economic progress.  

Adding to the potential upward pressure for mortgage rates is the recent Federal Reserve announcement to speed up the unwinding of the bond market and plans to raise short-term interest rates three times in 2022. Both of these actions are expected to help rates tick higher.

One clear takeaway: Although rates are likely to rise next year, borrowers still have access to favorable interest rates for the foreseeable future. Mortgage and refinance rates in the 3% range are still lower than almost any other time in mortgage rate history.  

How Will Mortgage Rates React to Omicron and Other COVID-19 Variants in 2022?

The impact COVID-19, and potential variants have on mortgage rates is likely to be less extreme in 2022 than in previous years.

When the initial wave of COVID-19, and subsequent lockdowns hit the U.S. we saw mortgage rates tumble. “What happened with COVID when it first hit us, we all kind of froze as a country,” says Logan Mohtashami, lead analyst at HousingWire, a housing industry publication. “We can’t replicate that anymore.” Subsequent surges in COVID cases haven’t had as much of a negative impact on the economy as the initial wave, he says. 

While there is a level of uncertainty surrounding the pandemic, we have more tools than before to navigate it. New variants will have a smaller impact on actual economic activity, but can still influence people’s expectations, says Danielle Hale, chief economist at Realtor.com. If you look at the Delta variant, “economic growth continued relatively smoothly. There was maybe a month or two were higher hiring slowed, but certainly didn’t stop.”

Another important factor to consider is COVID’s impact around the world. The U.S. economy has recovered faster than many global economies, which has created “a lot of demand for mortgage-backed securities coming from international investors,” says Daryl Fairweather, chief economist at Redfin. Stronger demand for these investments puts downward pressure on rates, which means that COVID impact internationally can influence mortgage rates in the U.S.

5 Housing Expert Mortgage Rate Predictions for 2022

4% By the End of 2022, says Joel Kan, an economist at the Mortgage Bankers Association

Joel Kan,
Joel Kan is an economist at the Mortgage Bankers Association

By the end of 2022, 30-year fixed mortgage rates will hit 4%, according to the Mortgage Bankers Association’s current forecast. There are a number of factors behind this prediction, “but one of the biggest reasons is really just the growth that we’re still expecting for the economy as a whole,” Kan says. Although supply chain issues have caused some disruption, that is expected to only delay some of the economic progress. “Instead of getting that really robust growth in the second half of ‘21, it seems like a lot of it pushed into the first half of 2022,” he says.

Higher interest rates are likely to make refinancing a less attractive option for homeowners, but the demand among buyers is expected to stay high. “We have a lot of younger people in the population entering, or who are already at, the prime homeownership age,” Kan says. Even as home builders deal with supply chain issues, the number of homes on the market is forecast to increase. Having more homes for sale should slow the pace of home price appreciation. Real estate markets are local, so what homebuyers deal with from one area to the next can vary. Overall, buyers should prepare for a competitive home buying process, albeit less aggressive than it was in 2021.

3.6% By the End of 2022, says Danielle Hale, chief economist at Realtor.com

Danielle Hale
Danielle Hale is the chief economist at Realtor.com

The increase in mortgage rates will be gradual, with rates hitting 3.6% by the end of 2022, according to Hale. Part of this trend will be influenced by the Federal Reserve, which is slowly unwinding its support of the bond market that had helped keep rates low. The Fed is also widely expected to raise the federal funds rate in 2022. “The Fed doesn’t directly control mortgage rates, but they do set short-term rates, which tend to influence longer-term rates,” Hale says.

With mortgage rates on rise, Hale recommends factoring potential rate increases into your homebuying budget. “You want to consider what mortgage rates are now and what they might be in the next quarter or two,” she says. As rates increase, the amount you can borrow to buy a home will decrease. If you anticipate this, then you won’t need to completely redo your home buying budget or reorganize your home search if it takes longer than planned to buy a home and rates have gone up. First-time homebuyers especially may want to heed this advice. “It might take you a little bit longer to find your first home,” Hale says.

‘Rates Can Go Down Next Year,’ says Logan Mohtashami, housing data analyst at HousingWire

 Logan Mohtashami
Logan Mohtashami is a housing data analyst at HousingWire

Not all experts agree on where rates will go up in 2022, and Mohtashami sees the potential for mortgage rates to go down. The bond market, not inflation or economic growth, is what to watch in 2022 to see where mortgage rates will move, he says. He forecasts bond rates to stay within a similar range to what they did in 2021, “and rates can go down next year,” he says. The Federal Reserve attempting to cool down the economy by raising interest rates is a signal that economic growth is hitting its high point. “Is that an environment where mortgage rates go really higher? I don’t believe so,” Mohtashami says. His outlook for mortgage rates is the same as for last year, with a low end of 2.375%-2.5% and a high end of 3.375% to 3.625%. But for us to see the high end of that range, Mohtashami believes the world economies would need to all come back online together. And we’re all still dealing with COVID around the world, he says.

For anyone looking to buy a home in 2022, you should prepare for “a more competitive market than people would like,” he says. Low housing inventory, low rates, and a large demographic of buyers in the prime homebuying age range will all play into this. For homeowners on the fence between renting versus buying, a drop in rates could turn the tables in favor of owning, especially as rent prices increase. “The marginal buyer might just come in and say you know what? I gotta buy, I don’t want to deal with this rent situation anymore,” Mohtashami says. By and large, experts say, mortgage rates won’t be the main driver in people’s decision to buy a home

3.6% By the End of 2022, says Daryl Fairweather, chief economist at Redfin

Daryl Fairweather
Daryl Fairweather is the chief economist at Redfin

We could see mortgage rates hit 3.6% by the end of 2022, Fairweather says. But there is uncertainty with inflation, the global economy, and demand for mortgages, which could impact this forecast. Higher-than-expected inflation could push rates up, in addition to causing the Federal Reserve to increase the federal funds rate faster than planned. Given the current situation, you don’t need to worry about a massive overnight surge in rates, unless something drastically changes, according to Fairweather. “My expectation for when mortgage rates will increase is spread pretty evenly throughout the year,” she says.

As long as rates stay low, homebuyers can expect to face healthy competition in the housing market. Be prepared to move quickly so when you find a home you like you can lock in your mortgage rate before it increases. But the other side of this is that rising rates could cool down the market somewhat. “If you do end up missing the boat and you have to wait till later in the year when mortgage rates are higher, I think you’ll have the benefit of a lot more selection,” Fairweather says. At the end of the day, buying a home should be a long-term decision. You can’t really lose as long as you’re staying in the house for a long time, she says: “In the long run home values will go up.”

3.6% to 3.7% By the End of 2022, says Len Kiefer, deputy chief economist at Freddie Mac

 Len Kiefer
Len Kiefer is the deputy chief economist at Freddie Mac

The Freddie Mac forecast for mortgage rates in 2022 is for rates to remain relatively low by historical standards but to increase to 3.6%-3.7% by the year’s end. High inflation has put upward pressure on rates, but it hasn’t caused them to skyrocket. We’ve recorded the highest level of inflation since 1982, but in 1982 mortgage interest rates in our survey were roughly 18% and they’re around 3% this week, Kiefer says. So far, inflation’s effect on mortgage rates has been “somewhat contained.”

As rates creep higher, this could slow the rapid appreciation we’ve seen in home prices, but isn’t expected to cause a price decline. Rising rates may push some buyers who are right on the edge of being able to afford a home, out of the market. “So it’s not painless, but the overall level [for mortgage rates] is still very low,” Kiefer says. That means buyers will want to be prepared for a busy housing market. Most of the country is in a situation where tremendous demand for housing, growing population, and a limited supply of homes is putting upward pressure on prices, Kiefer says. 

Winning Mortgage Strategies for 2022 and Beyond

Heading into 2022, it’s looking like we’ll have a strong spring homebuying season. Buyers should prepare for another seller’s market this year, albeit slightly less intense than what they faced in 2021. Home prices are forecast to continue increasing, but at a slower pace.

For homeowners who haven’t refinanced in recent years, rising rates could cut into the potential savings from a rate and term refinance. However, rapidly appreciating home values unlock the possibility to complete a cash-out refinance. With a cash-out refinance you could pay off high-interest debt or affordably finance home renovations. Increased home values may even give you a chance to get rid of private mortgage insurance (PMI) sooner than expected.

Get the Best Mortgage Rate for You

The most important step you can take to ensure you’re getting the absolute best mortgage rate is to shop around. Mortgage rates aren’t set by a single entity, and vary from one lender to the next. One study found that the difference between the highest and lowest mortgage rates offered among lenders was 0.75%. That means getting loan offers from multiple lenders could more than offset the rate increase projected in 2022 by some experts.

As you prepare to purchase a home or refinance your existing mortgage, you’ll want to pay close attention to your finances. Your personal situation also heavily influences the rate you’re eligible for. Take the time to build your credit score by paying your bills on time and paying down debt, especially revolving debt, such as credit card debt. If you’re buying a home, saving up for a bigger down payment will reduce your initial loan-to-value ratio, which can also lower your interest rate.

Properly Prepare to Buy a Home

Even if homes aren’t selling as fast as they did in 2021, homebuyers who are prepared to move quickly will have an advantage. Start by getting preapproved for a mortgage and determining your homebuying budget. This will help you narrow down the types of properties you can afford and hone in on where you want to live. Getting preapproved can also help you identify potential hangups in the mortgage underwriting process.

Part of setting yourself up for success when buying a home is working with the right real estate agent and lender. Find an agent that you connect with who also has experience working in the areas where you want to live. Real estate markets can be hyper local, and an agent who works in that area can give you a leg up on the competition when it comes to putting in an offer that conforms to the local norms. When choosing a lender, find someone who has experience dealing with the types of home loans that you are considering.

Carefully Consider Refinancing

A good rule of thumb is: It could benefit you if you can refinance into a rate that is at least 0.75% to 1% lower than your current rate. Whether you choose to refinance or not, depends on much more than just the refinance rate of your new loan. Consider your financial goals and how refinancing may, or may not, help you reach those goals. When you refinance there are upfront fees that can be 3% to 6% of the loan balance, that’s thousands of dollars for a typical home loan. Even if you can secure a lower rate, the fees you pay may outweigh any potential savings.

If a homeowner was three years into paying a $300,000 loan at 4.25%, there would be roughly $283,723 left on the loan, according to the NextAdvisor mortgage calculator. Here’s what that borrower could save if they refinanced into a new 30-year mortgage with an interest rate that is 0.75% lower. 

Loan AmountInterest RateMonthly PaymentTotal Interest Remaining
Original Loan$283,7234.25%$1,475$194,303
New Loan$283,7233.5%$1,274$174,944
Difference0.75%$201$19,359

In this scenario, the homeowner would pay $201 less a month and save just under $20,000 in interest over the life of the loan. One of the key components to making this refinance work is the closing costs and the length of time this borrower will keep the loan. If closing costs are $10,000, it would take over four years for the monthly savings to offset the upfront fees. 

However, reducing your monthly payment or the interest you owe aren’t the only reasons to refinance your mortgage. You may want to pay off your mortgage more quickly, and a short-term 15-year mortgage could help you accomplish that.

A cash-out refinance could help you fund other investments or home repairs, even though you would increase the size of your loan. So it’s important to understand your goals and all of the options available to you for achieving them.

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