By Jacob Passy
Mortgage rates have quickly risen to the highest levels seen since the first COVID-19 lockdowns were issued in 2020. For Americans in the market for a home loan, the added pressure of rising rates has complicated what is already a monumental decision.
The average rate on the 30-year fixed-rate mortgage was 3.55% as of the week ending Jan. 27, according to the latest interest-rate data from Freddie Mac /zigman2/quotes/202741363/composite FMCC +1.04% . While down slightly from a week earlier when the loan attracted an average rate of 3.56%, it is significantly higher than a year ago. At this time in 2021, the average rate for the benchmark mortgage product was 2.73%.
The 15-year fixed-rate mortgage, meanwhile, rose one basis point to an average of 2.8%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.7%, up 10 basis points from the previous week.
Though rates may not have fluctuated much over the past week, their recent rise has come about quickly and decisively. As recently as a month ago, rates were roughly half a percentage point lower than they are now.
Mortgage rates have risen, in large part, due to investors’ anticipation that the Federal Reserve will take swift action to address the breakneck pace of inflation. Where they go from, here, though is somewhat uncertain.
“Mortgage rates have risen preemptively, in advance of the Fed rate increase that’s expected in March,” said Holden Lewis, home and mortgage expert at personal-finance website NerdWallet.
“But we don’t know if that rate hike has been fully baked into mortgage rates, or if mortgage rates have risen too far,” Lewis added.
How will the Fed’s actions affect mortgage rates?
The Federal Reserve is taking two approaches to combatting inflation — it plans to raise interest rates and to stop its purchases of Treasuries and mortgage-backed securities. Both actions are likely to have an impact on mortgage rates, albeit in different ways.
By reducing the amount of mortgage-backed securities it buys, the Fed will no longer be pumping liquidity into the mortgage market as it once was. That liquidity was what enabled mortgage lenders to drop rates to record lows in the first year of the pandemic. And those lower rates prompted many Americans to seek out mortgage refinances, growing the profits of mortgage lenders.
Without that liquidity, mortgage lenders will need to raise rates to cushion their bottom line — though competition between lenders should help to keep rates competitive.
As for the interest-rate increases the Fed is expected to make as early as March, those likely have already been factored into the mortgage rates on offer to an extent. The Fed controls the federal funds rate, which is the interest rate banks use when trading their excess reserves to one another overnight. As a result, the Fed influences short-term interest rates directly.
But mortgage rates are a long-term rate. They are influenced, instead, by changes to the yields on long-term bonds, including the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.22% . Investors who purchase these bonds will factor their expectations regarding the Fed’s rate-setting activity into their decision-making — thus influencing long-term interest rates.
That said, most economists expect that the March rate hike would be just the first of multiple hikes, so mortgage rates still have room to move higher.
“It’s likely that even though there’s not a direct correlation between fed funds rates and mortgage rates, we’ll continue to see mortgage rates rise over the balance of the year as the Fed makes adjustments, and inflation impacts the economy,” said Rick Sharga, executive vice president at RealtyTrac.
Home buyers should be mindful of rate locks
In today’s market, given how much competition there is for the few homes that are up for sale, many buyers will find that they need to be pre-approved before they can make an offer. Depending on the lender they work with, they will also need to decide whether or not to lock in the interest rate.
As Bankrate.com notes , “some lenders offer a mortgage rate lock once the borrower is preapproved with just an address of a prospective home,” though in other cases the mortgage company will require that the seller has accepted the buyer’s offer before it will lock the rate.
There’s risk to locking in an interest rate though. Mortgage rate locks are generally good for 15 to 60 days, according to Rocket Mortgage /zigman2/quotes/219854810/composite RKT +2.60% . After that point, a buyer often will need to pay an extension fee to the keep the rate they locked or simply take the new rate on offer if they haven’t closed on the home.
Given the tight timeframe a buyer will have to close a deal, locking the rate in could cause them to feel the need to rush to find a home if they haven’t had an offer accepted already. Many buyers will see their offers rejected in this market, though, so it can take time to have a deal accepted.
Plus, locking in the rate prevents a household from taking advantage of lower rates if they become available. The volatility of the economy right now is such that mortgage rates do have some downside risk, even if virtually all economists expect them to rise throughout the year.
“Timing the market is extremely difficult and even though mortgage rates are currently on an upward trend, there’s no guarantee that they’ll be substantially higher a few weeks or months from now,” said Jacob Channel, senior economic analyst at LendingTree /zigman2/quotes/204207971/composite TREE +7.89% .
“As a result, buyers should focus more on things like whether or not they’re currently in a position where they can truly afford to buy a home or whether or not they’ve found a house that they actually want to live in and focus less on immediately buying so as to lock in a lower rate.”
Should you refinance your mortgage right now?
For most homeowners, the opportunity to save money by refinancing thanks to the interest rate alone has likely passed.
“Cash-out refinances are drying up,” Lewis said. “Many homeowners don’t want to give up their low mortgage rates.”
Some homeowners might benefit from taking out a home-equity line of credit instead, Lewis said. That would allow them to keep their current rate while cashing out the equity in their property — equity that has grown over the past two years, thanks to rising home prices. Most HELOCs have adjustable rates, though, and there is a risk to take out an additional loan.
Those who do pursue a refinance may not be able to lock in a lower rate, but they will find lenders who are hungry for their business.
“With refi volume dropping as rates rise, lenders are likely to compete aggressively for cash-out refi customers,” Sharga said. “In today’s lending environment, borrowers can probably save thousands of dollars in interest payments and closing costs simply by shopping around and getting quotes from multiple lenders.”
Still, even in those circumstances, real-estate experts recommended that homeowners seek to refinance sooner rather later — lest rates rise even higher than they already have.