A survey showed that mortgage rates rose in just the second week of the year, reaching levels not seen since March 2020.
Other new research shows that higher borrowing costs – which most experts say will only continue to head north as the economy improves – are driving borrowers to hold mortgage rates today that are still low by historical standards.
Fixed mortgage rates for 30 years
Mortgage giant Freddie Mac reported that the average 30-year mortgage rate rose to 3.45% last week, up from 3.22% the previous week. Rates are the highest since the week of March 26, 2020, according to Freddie Mac data.
One year ago, the 30-year rate was 2.79%, just above an all-time low of 2.65%, hit during the first week of January 2021.
But a lot has changed since then — namely, inflation and the Federal Reserve’s plans to combat it.
The government reported last week that inflation in 2021 rose by 7% – the highest level in 40 years – amid an increase in consumer demand and a continuing backlog in the supply chain.
“Mortgage rates are up across all mortgage loan types, with the 30-year mortgage increasing at about a quarter of a percent” from the previous week’s average of 3.22%, says Sam Khater, chief economist at Freddie Mac.
“This was driven by the possibility of faster-than-expected monetary policy tightening in response to persistent inflation exacerbated by uncertainty in labor and supply chains,” Khater says.
15 Years Fixed Return Mortgages
Freddie Mac says the interest rate on a 15-year fixed-rate mortgage averaged 2.62% last week, up from 2.43% the week before.
A year ago, the average short-term loan was 2.23%.
Note that Freddie Mac’s numbers are simply averages, which means there are higher – and even lower – rates out there. Some lenders still advertise 15-year refinancing loans at 2% and 30 years for as little as 3%.
If you’re a homeowner willing to take on higher monthly payments, you can lower your lifetime interest fee by trading a 30-year mortgage for 15 years.
5 year adjustable mortgage
The five-year adjustable rate mortgage (ARM) averaged 2.57% last week, up from 2.41% the week before.
Last year at this time, the five-year average ARM was 3.12%.
ARM usually starts at lower rates than fixed rate loans. But after a while, the ARM begins to adapt – that is, the price moves up or down in conjunction with the base price or some other benchmark.
If you financed your home with a popular 1/5 ARM — which offers a fixed rate for five years before adjustments begin — you might want to consider refinancing into a more stable fixed rate mortgage now that borrowing costs have risen.
More from MoneyWise
How do borrowers respond to rising interest rates?
Homebuyers seem to have received the message that prices are not likely to fall. Applications for homebuyer “buy” loans are up, according to the latest report from the Mortgage Bankers Association.
“Buyers flock to the market to claim a home before mortgage rates rise further as new listings slow slightly,” says Daryl Fairweather, chief economist at real estate brokerage Redfin.
According to 30-year mortgage rates, median home buyers are already paying $219 more per month than they did a year ago, says George Ratio, director of economic research at Realtor.com. That’s more than $2,600 a year.
“Real estate markets are unreasonably active in January, with many buyers responding to signs of rising prices and prices by striving to find the right home and fixing fixed-rate mortgage payments,” says Ratio.
Meanwhile, requests for refinancing loans from homeowners reached their lowest levels since January 2020.
“Prices at these levels are rapidly closing the door to refinancing opportunities for many borrowers,” says Joel Kahn, an economic and industry forecast expert at the Mortgage Bankers Association.
What drives higher rates?
With inflation levels not seen in previous decades, the Federal Reserve has been in a hot position to quell some of the demand that has driven up prices for cars, appliances and other consumer goods.
To help put an end to runaway costs, the central bank recently indicated that it will raise interest rates several times this year and stop buying bonds and mortgage-backed securities.
“If we see inflation continuing at high levels for longer than expected, if we have to raise rates more over time, we will,” Federal Reserve Chairman Jerome Powell said last week at a second-term hearing before the Senate Banking Committee.
Even with the explosion in COVID-19 cases from the rapidly spreading omicron variant, the future of the economy still looks good.
“The moderating effect of the Omicron wave, despite the large number of cases, points to a brighter post-pandemic horizon, a sentiment that supports a more optimistic view of the economy,” says Ratiou.
How to secure an appropriate mortgage rate
If you took out your mortgage when rates were higher than they are today, or if you wanted to refinance from a 30- to 15-year home loan, you want to make sure you’re doing everything you can to get the lowest rate.
That means comparing offers from at least five lenders, which can maximize your savings, according to research from Freddie Mac and others.
Lenders love to see a strong credit history. If you haven’t looked at your score in a while, today it’s easy to review your credit score for free.
If your credit can use some work — you may have accumulated a bunch of new debt during the pandemic — you might consider converting the credits to a low-interest debt consolidation loan. By doing this, you can reduce your interest costs and possibly get out of debt faster.
And if you’re not a candidate for a reference, there are other ways to lower your home ownership costs. When it’s time to buy or renew home insurance, flex your comparison shopping muscle again. You may find a lower price on your coverage.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.