Mortgage rates have climbed nearly two percentage points since the start of the year — the fastest pace in nearly four decades — making it even more expensive for prospective home buyers in an already overheated market.
Whether those rates climb further may hinge, in large part, on the effectiveness of the Federal Reserve’s attempts to quickly tame inflation.
The Fed is expected to raise its benchmark interest rate by half a percentage point on Wednesday as the rate of inflation, driven largely by jumps in energy and food prices, continues to grow. Because the benchmark rate, known as the federal funds rate, directly and indirectly affects the cost of many loans, the increase is intended to raise borrowing costs, slowing demand and reining in price increases.
Mortgage rates don’t move in lock step with the federal funds rate. They tend to track the yield on 10-year Treasury bonds, which is influenced by a variety of factors, including expectations for inflation.
“Inflation is the hub on the wheel,” said Greg McBride, the chief financial analyst at Bankrate.com. The risk is that rates will keep going up “unless and until we get some sustained evidence that inflation has peaked and begins to recede,” he added.
Though still low by historical standards, the rate on a 30-year fixed-rate mortgage averaged 5.10 percent for the week that ended April 28, according to Freddie Mac. That’s their highest point in 12 years and up from 2.98 percent a year ago. The average was 3.11 percent at the end of 2021.
Higher mortgage rates, combined with the jump in home prices — the median existing home was about 15 percent more expensive in March versus the year prior — have eaten into what would-be home buyers can afford.
It has also dampened demand: Applications have fallen to their lowest levels since 2018, according to the Mortgage Bankers Association.
“Prospective home buyers have pulled back this spring as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices,” Joel Kan, the group’s associate vice president of economic and industry forecasting, said last week.
With a down payment of 10 percent on the median home, the typical monthly mortgage payment is now $1,834 — up 49 percent from $1,235 a year ago, taking both higher prices and rates into account. And that doesn’t include other non-negotiables, like property taxes, homeowner’s insurance and mortgage insurance, which is often required on down payments of less than 20 percent.
Those costs add up over time. In a recent study, Jacob Channel, a senior economist analyst at LendingTree, using data from its online marketplace, found that the increase in rates from the start of the year could cost home buyers an extra $93,000, on average, over the life of a 30-year mortgage.