If there’s one word to sum up today’s mortgage rate market, it would be “volatile.”
Stubborn inflation -- and the Federal Reserve’s ongoing battle to tame it -- was the main catalyst for the mortgage rate surge of 2022. But drama surrounding the US debt ceiling deadline took center stage last week, sending mortgage rates above 7% for the first time since late last year.
Interest rate hikes from the Fed have had an indirect effect on mortgage rates. But what influences mortgage rates even more is the 10-Year Treasury Yield. If the government were to default on its debts, bond prices would’ve plummeted and yields would’ve soared, taking mortgage rates right along with them.
In the run up to the debt ceiling deadline, anxiety about a potential default pushed mortgage rates up significantly. Congress has agreed to raise the debt ceiling, however, narrowly avoiding an unprecedented default by the US government. This should help mortgage rates a bit, but they’re unlikely to decrease dramatically.
“Rates go up much faster than they come down, but if this perceived risk [of a US government default] abates, rates will come down,” said Melissa Cohn, regional vice president of William Raveis Mortgage.
Mortgage rates will continue to move up and down on a weekly basis, but the long-term trajectory of interest rates will depend on current and predicted inflation as well as the broader economic outlook. In addition to inflation, wage growth and lessened stress from the banking sector will continue to influence mortgage rates.
Regardless of what mortgage rates do next, it’s always important to compare offers from different lenders to find the lowest rate and most amenable loan terms. Here’s what you need to know about mortgage rates, how they work and how to find the best deal.
What to know first
Mortgage rates have nearly doubled over the past year, pushed up by persistently hot inflation, making it more difficult for homebuyers to afford a house. To rein in that hot inflation, the Federal Reserve has increased the cost of borrowing money via higher interest rates. The goal is to curb consumer spending and lower prices by dampening demand.
But after interest rates vaulted at a pace not seen since inflation soared 40 years ago, the central bank must soon decide when it’s time to pause. Many experts expected the Fed’s May meeting would mark the last increase of the current rate-hiking cycle. But while inflation has cooled somewhat, it’s still well above the Fed’s 2% target, leaving the possibility of another rate hike in June.
“The Fed has signaled that they would pause, but they’ve also made it very clear that they have not given up on their battle against inflation,” Cohn said. “Inflation is not moderating at a pace the Fed was expecting and retail sales were much stronger than the market was expecting. All that gives the Fed a reason to potentially consider raising rates again.”
However, an eventual pause from the Fed -- whether it comes in June or not -- should bring some relief to the mortgage market.
Despite the recent surge in mortgage rates, experts are optimistic that there will be some relief in the coming months. The average rate for a 30-year mortgage may fall close to 6% by the end of the year, according to the most recent housing forecast from Fannie Mae.
“Normally, mortgage rates peak well before the Fed is done hiking. That appears to be true now,” said Tom Graff, head of investments at Facet, a virtual financial planning services company.
What is a mortgage rate?
Your mortgage rate is the percentage of interest a lender charges for providing the loan you need to buy a home. The interest helps cover the costs associated with lending money -- and there are multiple factors that determine the rate you’re offered. Some are specific to you and your financial situation and others are influenced by macro market conditions, such as the overall level of demand for loans in your area or nationwide.
What factors determine my mortgage rate?
While the broader economy plays a key role in mortgage rates, there are some key factors under your control that impact your rate.
- Your credit score: Lenders will offer the lowest available rates to borrowers with excellent credit scores, of 740 and above. Lower credit scores are deemed greater risks for the potential of default, so lenders will charge higher rates to compensate.
- Your down payment: Your down payment affects your loan-to-value ratio. For example, if you’re making a down payment of $50,000 on a house that costs $500,000, you have a loan-to-value ratio of 90%. As a broad rule, lenders will offer lower rates if you can lower the loan-to-value ratio. For example, a borrower putting down just 3% of the purchase price will likely pay a higher rate than a borrower who puts down 25% of the purchase price.
- The loan term: The most common mortgage is a 30-year fixed-rate loan, which spreads your payments over three decades. Shorter loans such as 15-year mortgages have lower rates. However, the payments will be bigger because you’ll only have half the time to pay back the money.
- The loan type: The loan type will impact your interest rate. Some loans have a fixed interest rate for the entire life of the loan, while others have an adjustable rate -- which could result in significantly higher payments down the road.
- The property’s location: If you’re buying a home in an area where the rate of foreclosure has been higher, lenders may take that into consideration with your mortgage.
Current mortgage and refinance rates
What are today’s mortgage rates?
The average 30-year fixed mortgage rate is 6.98% with an APR of 7.00%. The average 15-year fixed mortgage rate is 6.37% with an APR of 6.40%. The average 5/1 adjustable-rate mortgage is 6.03% with an APR of 7.87%, according to Bankrate’s latest survey of the nation’s largest mortgage lenders.
Current mortgage rates
|30-year fixed-rate FHA||6.28%||7.19%|
|30-year fixed-rate VA||6.53%||6.64%|
|30-year fixed-rate jumbo||6.98%||7.00%|
|15-year fixed-rate jumbo||6.36%||6.38%|
|5/1 ARM jumbo||6.04%||7.83%|
|7/1 ARM jumbo||6.98%||7.60%|
|30-year fixed-rate refinance||7.10%||7.12%|
|30-year fixed-rate FHA refinance||6.35%||7.28%|
|30-year fixed-rate VA refinance||6.67%||6.86%|
|30-year fixed-rate jumbo refinance||7.12%||7.14%|
|20-year fixed-rate refinance||6.83%||6.86%|
|15-year fixed-rate refinance||6.49%||6.52%|
|15-year fixed-rate jumbo refinance||6.49%||6.51%|
|5/1 ARM refinance||5.97%||7.73%|
|5/1 ARM jumbo refinance||6.04%||7.54%|
|7/1 ARM refinance||6.71%||7.73%|
|7/1 ARM jumbo refinance||6.99%||7.58%|
|10/1 ARM refinance||7.10%||7.65%|
We use information collected by Bankrate, which is owned by the same parent company as CNET, to track daily mortgage rate trends. The above table summarizes the average rates offered by lenders across the country.
What is ‘annual percentage rate’ and what does it mean for mortgages?
The annual percentage rate, or APR, represents the true cost of your loan by factoring in the interest rate and other costs such as lender fees or prepaid points. So, while you might be tempted to see an offer for “interest rates as low as 6.5%” it’s important to look at the APR instead to see how much you’re really paying.
Pros and cons of getting a mortgage
You’ll build equity in the property instead of paying rent with no ownership stake.
You’ll build your credit by making on-time payments.
You’ll be able to deduct the interest on the mortgage on your annual tax bill.
You’ll take on a sizable chunk of debt.
You’ll pay more than the list price -- potentially a lot more over the course of a 30-year loan -- due to interest charges.
You’ll have to budget for closing costs to close the mortgage, which add up to tens of thousands of dollars in some states.
How does the APR affect principal and interest?
Most mortgage loans are based on an amortization schedule: You’ll pay the same amount each month for the life of the loan even though the generated interest will be highest at the beginning of the loan and will taper as the principal decreases. (Your amortization schedule will show how much of your monthly payment goes to interest and how much pays down the principal of the loan.) Ultimately, most borrowers appreciate the convenience of a fixed, predictable monthly payment.
Shopping mortgage rates
Mortgage lenders often publish online their rates for different mortgage types, which can help you research and narrow down which lenders you apply to for preapproval. Shopping around is an important part of the process. And it’s often a mistake to rush the process.
Most conventional loans require a credit score of 620 or higher, but Federal Housing Administration and other loan types may accommodate lenders with scores as low as 500, depending on your down payment. If you have a high credit score, you may be offered a lower interest rate and more modest down payment. Improving your credit score before applying for a mortgage can save you money even if you already qualify for a loan.
Your credit score isn’t the only factor that impacts your mortgage rate. Lenders will also look at your debt-to-income ratio to assess your level of risk based on the other debts you’re paying back such as student loans, car payment and credit cards. Additionally, your loan-to-value ratio plays a key role in your mortgage rate. A larger down payment will reduce your loan-to-value ratio, which lenders like to see.
However, you don’t want to stretch so far with your down payment that you are left without cash reserves when you move into your home, and keeping some liquid savings may help your lender’s confidence in your ability to pay back the loan, potentially lowering your rate.
A rate lock protects you if mortgage rates rise between the time you’re preapproved and the time you actually close on the house. For example, if you lock in a rate at 6.5% today and your lender’s rates climb to 7.25% over the next 30 days, you still get the lower rate. Rate locks don’t last forever, though. A common rate-lock period is 45 days, so you’re still on a tight timeline. Be sure to ask lenders about rate lock windows and the cost to secure your rate.
Mortgage rates are always moving, and it’s impossible to predict the market. However, all signs point to an additional uptick in mortgage rates due to the Federal Reserve’s efforts to fight inflation in the short term. There’s some good news on the horizon, though. Fannie Mae’s forecast calls for 30-year mortgage rates to fall as low as 6.0% by the end of 2023.