After nearly two years of record-low mortgage rates, 2022 has seen rates rise to levels not seen in more than a decade.
That doesn’t mean you need to cancel your plans to purchasing a home.
There’s a lot more that goes into the decision than just your interest rate, but rising rates will factor into your decision.
A recovering U.S. economy and supply chain issues helped drive inflation to levels we haven’t seen in decades. To keep inflation in check, the Federal Reserve has been raising its benchmark short-term interest rate. Those increases have pushed up the cost of borrowing money, with mortgage rates more than doubling since January. The main drivers for mortgage rates in 2022 will be, “growth, plus inflation, plus the Fed, really in a nutshell that’s what’s going to be driving rates,” Joel Kan, an economist with the Mortgage Bankers Association, told NextAdvisor.
Let’s take a look at the past few years of historical mortgage rate trends and break down what that means for you.
Historical Mortgage Rate Averages Since 2019
About These Rates
These rate averages are based on weekday mortgage rate information provided by national lenders to Bankrate.com, which is owned by the same parent company as NextAdvisor. These marketplace average rates for a variety of refinance loan types are updated daily, though it is possible rates have changed since this was last updated.
What’s Going On With Rising Mortgage Rates?
The surge in mortgage rates so far this year is due to a variety of economic factors. Persistently high inflation is a big one. September’s inflation report showed prices up 8.3% year-over-year, which was lower than August’s 8.3% but still far too high for comfort.
Another important driver behind mortgage rate increases is the latest rate hike by the Federal Reserve — the central bank’s third 75-basis-point increase in a row. “Until we get some sustained evidence that inflation is beginning to recede, the upward pressure on mortgage rates will remain,” Odeta Kushi, deputy chief economist at First American Financial Corporation, told us.
Mortgage rates are moving around quickly, with big changes every day. Experts say the volatile economic environment makes it important for consumers to shop around and to keep an eye on their rate offers when buying a home. “It means you have to watch rates like a hawk,” Melissa Cohn, regional vice president of William Raveis Mortgage in New York told us.
History of the 30-Year Fixed Mortgage Rate
This chart, which uses data from a survey by Freddie Mac that differs slightly but generally tracks with the Bankrate survey used by NextAdvisor, offers a glimpse at how today’s rates compare with the past two decades.
What Can Homebuyers Do About Rising Mortgage Rates?
The current housing environment is particularly tough for first-time homebuyers, but it might still make sense 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,” Eileen Derks, head of mortgage at Laurel Road, told us.
Rising mortgage rates have made affordability increasingly difficult for homebuyers, despite some drops in home prices. If you’re considering a mortgage, experts say it’s more important than ever to shop around with different lenders, as rates can vary dramatically from day to day and from lender to lender.
“Until you’re ready to lock, you need to keep your eye on more than one ball,” Cohn says.
What About Home Prices?
The big surge in mortgage rates has started to bring down home prices. The median existing home sold for $389,500, up 7.7% from a year earlier but down from figures of more than $400,000 seen earlier in the summer, according to the National Association of Realtors (NAR).
How quickly the housing market is turning around depends on where you are. In some cities, prices are seeing month-to-month price drops of nearly 3%, while others are still riding a wave of increases. “It’s very market-dependent at the moment,” says Robert Heck, vice president of mortgage at Morty, an online mortgage broker.
Home sales figures are dropping significantly – down 0.4% from July to August and nearly 20% from August 2021 – in part because homeowners who have favorable mortgage rates are unwilling to sell and get a loan at a much higher rate.
Homebuyers facing a difficult environment can find creative ways to save money on a home purchase. One is to consider an adjustable-rate mortgage, Cohn says. They tend to offer periods of several years with a fixed rate – and it should be significantly lower than a 30-year fixed rate would be – before the rate starts to adjust with the market. That should give you a few years to refinance if the market improves.
Related: NextAdvisor’s Best Mortgage Lenders.
Frequently Asked Questions (FAQ):
What Are Mortgage Interest Rates Based On?
No government entity sets or directly regulates mortgage rates. Rather, they’re based on a number of broader market factors. Everything from the demand for housing, inflation, and the overall health of the economy can influence mortgage rates — as well as refinance rates.
Typically, when the economy is strong and unemployment rates are low, rates will rise because demand is higher. But during an economic downturn rates tend to dip. This is why the economic impact of COVID variants is important to pay attention to when it comes to understanding mortgage rate trends.
Monetary policies set by the Federal Reserve can also have a significant impact on mortgage rates, even though they don’t directly set rates. When the Federal Reserve lowers the federal funds rate or purchases large quantities of treasury bonds, it puts downward pressure on mortgage rates.
How Does Credit Score Affect My Rate?
Aside from macroeconomic factors that are out of your control, your personal situation will also influence the interest rate you’re eligible for. Your down payment and credit score can have a big impact on your mortgage rate.
Lenders set mortgage rates based on how risky they determine a loan to be. So having a lower credit score, or smaller down payment will increase the rate you’re likelyto qualify for. On the other hand, improving your credit score and having a bigger down payment can have the opposite effect and reduce your interest rate. While each lender has different standards, having a down payment of at least 20% and a credit score of 700 to 740 will typically get you the lowest mortgage rate.
If you’re having trouble qualifying for a mortgage or getting a decent interest rate, you may have better luck with a government-secured loan. Certain mortgages are backed by the different departments of the federal government and are considered less risky by lenders. There are loans guaranteed by the Federal Housing Administration (FHA loan), Department of Veterans Affairs (VA loan), and the Department of Agriculture (USDA loan).
What Is an APR?
The annual percentage rate, or APR, shows you more than just the interest rate on your loan. It also includes many of the fees you pay on any mortgage or refinance. While your mortgage interest rate is the biggest long-term cost associated with a home loan, it’s not the only expense to pay attention to. Anytime you take out a mortgage, there are upfront fees known as closing costs. This can include fees paid to the appraiser and home inspector, as well as loan origination fees, and discount points. All of these costs add up, and can easily be anywhere from 3% to 6% of the loan amount.
These initial costs can vary significantly by lender. So if you’re comparing loan offers based only on the interest rate, you could end up paying more fees than necessary. This is why understanding APR is important. If one loan has higher loan fees, that will be reflected in the APR, but not the interest rate. So the APR gives you a better idea of the total cost of the mortgage.
Rates as of February 4, 2022