Mortgage rates were varied this week, but one notable rate shrank. Here's how inflation may affect your payments.
Mortgage rates were on a split path over the past seven days. While the 15-year fixed mortgage rates inched up, interest rates on the closely followed 30-year fixed-rate mortgage moved downwards. At the same time, average rates for 5/1 adjustable-rate mortgages increased.
Mortgages hit a 20-year high in late 2022, but now the macroeconomic environment is changing again. Rates dipped significantly in January before climbing back up in February. Ahead of the Federal Reserve's May meeting, rates continue to bump around in the 6% range.
After raising rates dramatically in 2022, the Fed opted for smaller, 25-basis-point rate increases in its first two meetings of 2023. The decision to hike by 0.25% on March 22 suggests that inflation is cooling and the central bank may be able to ease up -- but not stop -- on its rate hikes. This could have an impact on mortgage rates, but it's difficult to say just how much for a market already in flux.
"We're in one of the most volatile markets in terms of rates since 2008," said Jennifer Beeston, senior vice president at Guaranteed Rate, a national mortgage lender.
While rates don't directly track changes to the federal funds rate, they do respond to inflation. Overall, inflation remains high but has been slowly but consistently falling every month since it peaked in June 2022.
Mortgage rates have dipped a bit from their December 2022 peak, but they still aren't dramatically lower. Fewer buyers are willing to jump into the housing market, driving demand down and causing home prices to ease, but that's only part of the home affordability equation.
"Even though home prices in many parts of the country have fallen since the start of the year, high rates make buying prohibitively expensive for many," said Jacob Channel, senior economist at loan marketplace LendingTree. It's still difficult for many buyers, particularly those looking for their first home, to afford a monthly payment.
What does this mean for homebuyers this year? Mortgage rates are likely to decrease slightly in 2023, although they're highly unlikely to return to the rock-bottom levels of 2020 and 2021. However, rate volatility may continue for some time.
"Expect mortgage rates to yo-yo up and down in the first half of the year, at least until there is a consensus about when the Fed will conclude raising interest rates," said Greg McBride, CFA and chief financial analyst at Bankrate. (Like CNET Money, Bankrate is owned by Red Ventures.) McBride expects rates to fall more consistently as the year progresses. "Thirty-year fixed mortgage rates will end the year near 5.25%," he predicted.
Rather than worrying about market mortgage rates, homebuyers should focus on what they can control: getting the best rate they can for their situation.
"Instead of getting into the minutiae of what the market's doing every 6 seconds, buyers need to focus on what it is they're really trying to accomplish and have a good game plan," Beeston said.
Take steps to improve your credit score and save for a down payment to increase your odds of qualifying for the lowest rate available. Also, be sure to compare the rates and fees from multiple lenders to get the best deal. Looking at the annual percentage rate, or APR, will show you the total cost of borrowing and help you compare apples to apples.
The average interest rate for a standard 30-year fixed mortgage is 6.85%, which is a decrease of 3 basis points from one week ago. (A basis point is equivalent to 0.01%.) Thirty-year fixed mortgages are the most frequently used loan term. A 30-year fixed mortgage will typically have a higher interest rate than a 15-year fixed rate mortgage -- but also a lower monthly payment. Although you'll pay more interest over time -- you're paying off your loan over a longer timeframe -- if you're looking for a lower monthly payment, a 30-year fixed mortgage may be a good option.
The average rate for a 15-year, fixed mortgage is 6.27%, which is an increase of 10 basis points from seven days ago. You'll definitely have a bigger monthly payment with a 15-year fixed mortgage compared to a 30-year fixed mortgage, even if the interest rate and loan amount are the same. But a 15-year loan will usually be the better deal, if you can afford the monthly payments. These include typically being able to get a lower interest rate, paying off your mortgage sooner, and paying less total interest in the long run.
A 5/1 ARM has an average rate of 5.80%, a climb of 8 basis points compared to last week. You'll usually get a lower interest rate (compared to a 30-year fixed mortgage) with a 5/1 ARM in the first five years of the mortgage. However, you could end up paying more after that time, depending on the terms of your loan and how the rate shifts with the market rate. If you plan to sell or refinance your house before the rate changes, an ARM may make sense for you. If not, shifts in the market might significantly increase your interest rate.
Mortgage rates were historically low throughout most of 2020 and 2021 but increased steadily throughout 2022. Now, mortgage rates are roughly twice what they were a year ago, pushed up by persistently high inflation. That high inflation prompted the Fed to raise its target federal funds rate seven times in 2022. By raising rates, the Fed makes it more expensive to borrow money and more appealing to keep money in savings, suppressing demand for goods and services.
Mortgage interest rates don't move in lockstep with the Fed's actions in the same way that, say, rates for a home equity line of credit do. But they do respond to inflation. As a result, cooling inflation data and positive signals from the Fed will influence mortgage rate movement more than the most recent 25-basis-point rate hike.
We use rates collected by Bankrate to track changes in these daily rates. This table summarizes the average rates offered by lenders across the US:
|30-year jumbo mortgage rate||6.87%||6.97%||-0.10|
|30-year mortgage refinance rate||7.00%||7.04%||-0.04|
Rates as of April 25, 2023.
You can get a personalized mortgage rate by connecting with your local mortgage broker or using an online calculator. Make sure to consider your current financial situation and your goals when looking for a mortgage.
Things that affect the mortgage rate you might get include: your credit score, down payment, loan-to-value ratio and your debt-to-income ratio. Having a higher credit score, a larger down payment, a low DTI, a low LTV or any combination of those factors can help you get a lower interest rate.
The interest rate isn't the only factor that affects the cost of your home. Be sure to also consider additional factors such as fees, closing costs, taxes and discount points. Be sure to shop around with multiple lenders -- such as credit unions and online lenders in addition to local and national banks -- in order to get a mortgage that works best for you.
When picking a mortgage, remember to consider the loan term, or payment schedule. The most common loan terms are 15 years and 30 years, although 10-, 20- and 40-year mortgages also exist. Mortgages are further divided into fixed-rate and adjustable-rate mortgages. For fixed-rate mortgages, interest rates are set for the life of the loan. Unlike a fixed-rate mortgage, the interest rates for an adjustable-rate mortgage are only set for a certain amount of time (commonly five, seven or 10 years). After that, the rate changes annually based on the market rate.
When choosing between a fixed-rate and adjustable-rate mortgage, you should think about how long you plan to stay in your house. Fixed-rate mortgages might be a better fit if you plan on staying in a home for a while. While adjustable-rate mortgages might have lower interest rates upfront, fixed-rate mortgages are more stable in the long term. If you aren't planning to keep your new home for more than three to 10 years, though, an adjustable-rate mortgage might give you a better deal. The best loan term is entirely dependent on your personal situation and goals, so be sure to consider what's important to you when choosing a mortgage.