Mortgage rates broke past the 7% marker in late August and haven’t taken a dip in September.
The average rate for a 30-year fixed mortgage was 7.42% last week, according to CNET sister site Bankrate.
Inflation is showing signs of easing, leading the Federal Reserve to pause interest rate hikes during its Sept. 20 meeting. But the Fed could still push for an additional rate increase in the coming months, which experts say would push mortgage interest rates even higher.
Here’s what experts say about September’s mortgage rate trends and what to do if you’re in the market for a new home.
Experts predict: What will happen with mortgage rates in September?
High mortgage rates are a byproduct of the Federal Reserve’s ongoing battle to bring inflation down by making it more expensive to borrow. During its September meeting on monetary policy, the Fed voted to hold its federal funds rate at a range of between 5.25% and 5.50%. Even though interest rate hikes are on pause, however, mortgage rates might not pause with them.
If inflation proves stickier than expected, and the Fed opts to hike rates again in 2023, it’s highly likely that mortgage rates could climb to 8%, according to Erin Sykes, chief economist at Nest Seekers International. The higher mortgage rates climb, the less affordable it is to purchase a house.
The Fed has said it’s willing to adjust its stance and that it will take into account a variety of factors to determine its next move including “readings on labor market conditions, inflation pressures and inflation expectations and financial and international developments.”
The Fed’s decision to hold steady in September was widely anticipated by financial markets. As a result, some experts predict mortgage rates will remain mostly flat for the remainder of the month. Glenn Brunker, president of mortgage lender Ally Home, expects the average rate for a 30-year fixed mortgage will sit close to 7.5% in September.
What really matters for mortgage rates is measuring if the inflation rate can come down to the Fed’s 2% target and stay there. If consumer prices are kept in check over the long term, and borrowing rates ease, mortgage rates could stabilize and even trend down, according to Jiayi Xu, economist at Realtor.com.
Fannie Mae recently adjusted its end of year forecast on average 30-year fixed mortgage rates, saying the key rate will end the year at 7.1%. Meanwhile, the Mortgage Bankers Association forecasts 6.3% by the end of 2023.
What is affecting mortgage rates right now?
Last spring, the Fed began bumping up its federal funds rate, also called the benchmark rate -- a short-term interest rate that determines how much banks charge each other to borrow money. As part of its bid to reduce prices by weakening demand, the central bank increased rates 11 times since March 2022, most recently by a quarter of a percent on July 26. During its September meeting, the Fed voted to forgo another rate hike.
However, the Fed’s interest rate hikes and the high-inflation environment aren’t the sole influences behind elevated mortgage rates. Mortgage rates are also affected by other macroeconomic factors, a combination of market conditions, investor confidence and global events.
- Inflation: While the Consumer Price Index shows inflation has been slowly cooling overall to 3.7% since its peak at 9.1% last June, housing costs are the main contributor to today’s inflationary environment, growing 7.3% annually in August. Generally, when inflation is high, mortgage rates tend to be high.
- Monetary policy: The Federal Reserve balances economic growth by adjusting the money supply, which impacts the interest rates for borrowers. Though the Fed doesn’t set consumer mortgage rates directly, establishing the federal funds rate impacts the direction of longer-term rates, such as 30-year mortgage rates.
- The bond market: When a lender issues a mortgage, that home loan is packaged with other mortgages, creating a type of bond called a mortgage-backed security. Those bonds are then sold to investors so the bank has money for new loans. Mortgage lenders often use long-term bond yields, like the 10-Year Treasury, as a benchmark to set the interest rates on home loans. When yields rise, mortgage rates typically increase.
Expert advice for homebuyers
Higher mortgage rates mean it’s more difficult to afford a home now, but the reduced demand also means less competition.
“I think the smarter buyers will be making a value play buying now, as compared to when rates drop and everyone jumps back into the market,” said Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage.
Still, don’t rush into a major purchase like buying a home without knowing what you can afford, especially with today’s higher rates. If you haven’t updated your homebuying budget recently, you could be in for a rude awakening when you get a mortgage quote.
CNET’s mortgage calculator can help you figure out and prepare for monthly payments.
Consider the rent vs. own equation
The housing market shouldn’t determine if you’re getting a home -- your personal situation and financial circumstances should.
Whether it makes more sense to rent or buy a home isn’t just about comparing monthly rent to a mortgage payment. Buying a home requires thousands of dollars in upfront fees and a down payment, in addition to ongoing maintenance and upkeep costs. How long you plan to live in the area should also factor into your decision. If you sell the house in two or three years, you may not have enough equity built up to offset the fees.
Over the long term, though, buying a home can be a good way to increase your net worth, unlike renting. When you buy, you can also lock in a fixed interest rate, so your monthly payments won’t fluctuate compared to the rental market.
As the age-old saying goes, “Marry the home, date the rate,” meaning the rate you lock in when you take out a mortgage doesn’t have to be permanent. If rates decline in the future, you can refinance your mortgage to get a new, lower rate.
Shop around for lenders
Not all mortgage lenders are created equal. When you start looking for potential lenders, it’s a good idea to compare multiple offers at once.
Based on factors such as your credit score, debt-to-income ratio and down payment, a lender can estimate your interest rate, monthly mortgage payment and closing costs. Experts recommend getting at least three loan estimates from different lenders so you can get a true apples-to-apples comparison.
A good lender should be in tune with what’s available in your market and help you navigate your options, in addition to explaining things like how private mortgage insurance factors in.
Most importantly, it’s critical to work with a reputable and preferably local lender, said Alix Nadi from Re/Max Around Atlanta Realty. “They are the only ones who can give definitive answers regarding what the buyer qualifies for, what those payments look like and what costs are associated with the purchase.”