Warmer temperatures await us – but also higher mortgage ratesbased on a trend that has accelerated in recent weeks.
Fair three months ago, housing experts expected rates on the benchmark 30-year fixed-rate mortgage to be between 3.1% and 3.4% at this time. What a difference a few weeks make: Rates have risen rapidly since the start of the year, reaching nearly 4.75% for the 30-year mortgage and just below 3.9% for the 15-year mortgage, according to Bankrate National Survey of Lenders.
Unfortunately for potential buyers and refinancers, this more expensive rate climate is likely the new normal, and all markers point to higher mortgage rates in the weeks and months ahead.
April brings a new tariff reality
This month will see a continued decline in affordable rates, says Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors.
“Mortgage rates have risen faster than expected over the past two weeks,” Evangelou said. “In the meantime, high inflation will continue to put upward pressure on mortgage rates, as it will take several months for the Federal Reserve to slow it down.”
These and other reasons lead Evangelou to believe that rates will average 4.4% and 3.7%, respectively, for a 30-year and 15-year mortgage in April.
Count Rick Sharga, executive vice president of RealtyTrac, among the pessimistic rate forecasters.
“Mortgage rates have already exceeded the peak price that most analysts had expected for 2022. And they are unlikely to reverse any time soon due to inflationary pressures and rate hikes announced by the Federal Reserve and reduction in the bond market,” Sharga said. “In April, I think we will be looking at fixed rates between 4.25% and 4.5% for 30-year loans and between 3.50% and 3.75% for 15-year loans.”
As inflation continues to accelerate and the Fed is about to let its bond portfolio deplete, all signs point to a rate hike, agrees Greg McBride, chief financial analyst for Bankrate.
“The benchmark 30-year fixed mortgage rate will knock 5% for the first time since 2018. Even 15-year fixed rates will hover around 4% this month,” McBride says.
Where do those in the know expect rates to land by Independence Day? Sharga, for his part, sees 30-year and 15-year mortgage rates rising to 4.75% and 4.0%, respectively, by then.
“All signals suggest that mortgage rates will continue to rise for the rest of the year,” Sharga said. “The Federal Reserve is signaling that it will be more aggressive with rate hikes if they are needed to curb inflation, which continues to rise due to supply chain disruptions and dramatic increases in the cost of fuel. energy, food and housing.Yields on 10-year US Treasuries, which mortgage rates run alongside, also rose more than 2.5%.
Inflation is unlikely to subside until the Fed has imposed several rate hikes.
“But once that happens, mortgage rates will likely have peaked,” McBride says. “It’s unclear if that will happen by the middle of the year, although nothing before the end of the summer seems unlikely at this point. Keep in mind that inflation is the hub of the Unless and until we have at least some hope of a reversal in inflation, upward pressure on mortgage rates will likely persist.
“While the next few weeks will be unpredictable as markets continue to turn, the outlook is that mortgage rates will rise further,” Evangelou said. “The Federal Reserve has indicated six more interest rate increases through to the end of 2022. However, as inflation will eventually ease later this year, mortgage rates may not rise as quickly as they would. have done recently. That’s why I expect the 30-year fixed mortgage rate to average around 4.5% by mid-2022. »
Of course, the continuation of the war in Ukraine adds uncertainty to the markets, which could keep rates lower than expected.
“But on the other hand, while Russia and Ukraine are major producers of a range of commodities, further supply chain disruptions could drive up inflation and mortgage rates further. than many anticipate,” says Evangelou.
In their real estate forecasts at the end of March, Fannie Mae forecast the 30-year fixed-rate mortgage to average 3.8% more acceptable by mid-year and 3.8% through 2022, down from 4.2% and 4.5% planned by the Mortgage Bankers Association.
Don’t wait for prices to drop
With fixed mortgage rates looking less attractive these days, some borrowers are taking a closer look at adjustable rate mortgages (ARMs), which appeal with lower introductory period rates.
“This strategy can make sense because saving half a percent or more on the initial loan phase can make a significant difference in monthly payments,” Sharga says. “But there’s no guarantee that rates won’t rise even more by the time your ARM rate is due to reset. Borrowers who have a relatively short time horizon, perhaps those who are planning to sell a home during the the initial low-interest phase of an ARM, or borrowers consolidating higher-interest debt, might be good candidates for ARM loans.
Be warned, though: anyone with an ARM should pay close attention to market trends. — then, if rates drop, switch quickly to a fixed-rate loan, Sharga recommends.
“And they may need to get creative when their loan is about to be reset, perhaps refinancing into another short-term ARM loan,” Sharga says.
Evangelou remains a bigger fan of fixed-rate mortgages, which she says are still a good deal today compared to many years ago.
“Although the rates are higher than last year, they are still historically low,” Evangelou said. “As a result, home sales in February surpassed pre-pandemic levels.”
In February 2018, when mortgage rates also rose to 4.4%, around 320,000 existing homes were sold. By comparison, nearly 360,000 existing homes were sold in February 2022.
As recently as the housing bubble of 2005 to 2008, mortgage rates regularly hovered between 6% and 7% for 30-year loans.
Still, that doesn’t lessen the blow as mortgage rates have risen more than 1.2 percentage points since the start of this year.
“So the typical buyer has to spend $250 more each month to be able to buy a house. Since the beginning of 2022, almost 9.7 million households have already been excluded from the market due to higher tariffs,” adds Evangelou.
Nonetheless, interest rates are poised to rise further and no slowdown in home appreciation is on the horizon.
“Anyone looking to buy a house this year would probably be wise to do so sooner rather than later if they can find a house for sale and it’s a house they can afford,” Sharga says.
But if you’re eager to refinance, you might want to wait in the hope that rates will eventually come down.
“But borrowers looking to tap into their home equity for a cash refinance would probably be better off doing so now than waiting a few months,” Sharga says, “since interest rates on these loans will likely continue. to increase for the rest of the year.”