Over the past seven days, drama surrounding the US debt ceiling pushed daily mortgage rates above 7% for the first time since late last year.
While the big story of the mortgage market has been inflation, and the Federal Reserve’s ongoing battle to tame it, the US debt ceiling crisis has taken center stage. Without a deal in place to raise the ceiling by June 5, the US government may default on its debt.
This affects mortgage rates through government-backed bonds. When people invest in these bonds, they’re letting the government use their money for a set term -- anywhere from one month to 30 years -- with interest. As we’ve gotten closer to the debt ceiling deadline, those bonds have gotten riskier for investors, and riskier bonds mean higher interest rates.
Mortgage rates are generally set based on the prices of mortgage-backed securities, such as bonds secured by mortgages. If the government were to default, bond prices would plummet and yields would soar. Mortgage rates, which track the 10-Year Treasury Yield, would follow suit.
But higher mortgage rates don’t just decrease home-buying power, they also have an impact on inventory levels. With many homeowners reluctant to let go of their mortgage rates, many of which are below current market values, real estate inventory is dwindling. As of May 21, new listings of homes for sale were down by 24.1% compared to a year ago, according to real estate brokerage Redfin.
For buyers who’ve grown accustomed to mortgage rates in the 6% range, the most recent surge is concerning. But experts remain optimistic that mortgage rates will see some relief by the end of the year.
“All of this uncertainty is not good for mortgage rates, which are currently higher to account for all the risk-based market [activity],” said Melissa Cohn, regional vice president of William Raveis Mortgage. “Once we see some of this volatility calm down, we should see some meaningful relief in the rate market.”
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 for you.
What to know first
Mortgage rates are roughly twice what they were a year ago, pushed up by persistently hot inflation. Since last March, the Federal Reserve has raised its benchmark federal funds rate from zero to 5.25% -- most recently by 0.25% on May 3. The central bank utilizes rate hikes and cuts to rein in or encourage economic growth.
Put simply, inflation is a case of too much money chasing too few goods, driving up prices for just about everything in the process. To bring inflation down, the central bank 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 inflation, which was at 4.9% in April, has been steadily decreasing and the Fed has signaled that ongoing rate increases may no longer be necessary. Instead, the Fed is expected to hold rates steady until inflation reaches its 2% target.
Mortgage rates, which aren’t directly set by the Fed, will likely 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, lessened stress from the banking sector and the potential for a US debt ceiling default will continue to influence mortgage rates.
If inflation continues to inch closer to its 2% target and the Fed is able to pause its rate increases, mortgage rates may stabilize or even decrease. If future inflation data is higher than expected, mortgage rates will increase in response. “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. “Going forward, mortgage rates are going to move more with the outlook for the economy broadly,” he said.
While recent inflation data leaves the possibility of another rate hike in June, an eventual pause from the Fed should bring some relief to the mortgage market. The average rate for a 30-year fixed mortgage may fall close to 5.7% by the end of the year, according to the most recent housing forecast from Fannie Mae.
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 7.17% with an APR of 7.20%. The average 15-year fixed mortgage rate is 6.61% with an APR of 6.64%. The average 5/1 adjustable-rate mortgage is 6.00% with an APR of 7.74%, according to Bankrate’s latest survey of the nation’s largest mortgage lenders.
Current mortgage rates
|30-year fixed-rate FHA||6.27%||7.19%|
|30-year fixed-rate VA||6.48%||6.59%|
|30-year fixed-rate jumbo||6.95%||6.97%|
|15-year fixed-rate jumbo||6.35%||6.36%|
|5/1 ARM jumbo||6.04%||7.82%|
|7/1 ARM jumbo||6.98%||7.60%|
|30-year fixed-rate refinance||7.05%||7.07%|
|30-year fixed-rate FHA refinance||6.35%||7.28%|
|30-year fixed-rate VA refinance||6.58%||6.77%|
|30-year fixed-rate jumbo refinance||7.06%||7.08%|
|20-year fixed-rate refinance||6.67%||6.70%|
|15-year fixed-rate refinance||6.49%||6.52%|
|15-year fixed-rate jumbo refinance||6.49%||6.50%|
|5/1 ARM refinance||5.98%||7.73%|
|5/1 ARM jumbo refinance||6.04%||7.54%|
|7/1 ARM refinance||6.72%||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 5.7% by the end of 2023.