For the past decade, American homeowners grew accustomed to mortgage rates that once would have been unthinkably low. The rate on a 30-year loan started with a three or a four, maybe even a two.
Rates above 5 percent? That was exceedingly rare. During the past 10 years, the average cost of a 30-year mortgage topped the 5 percent threshold for just one fleeting six-week period in late 2018, according to Bankrate’s weekly national survey of lenders.
Times are changing fast, though. The average rate on a 30-year loan surged to 4.73 percent in this week’s survey — and 5 percent might not be far away.
“I would expect 5 to show up within a month, especially if there are additional Russian sanctions that point to greater supply issues,” says Joel Naroff, president of Naroff Economic Advisors.
Ken H. Johnson, a housing economist at Florida Atlantic University, likewise says rates could hit the 5 percent mark soon. “Unless things slow down in the 10-year Treasury note market, any day now,” he says. “We are outside the bounds of normality now. Strange things happen at the peak of a market.”
Why are mortgage rates rising so fast?
The forces driving mortgage rates are notoriously complicated, but here are four factors:
- The economy is back: The pandemic sent the U.S. economy into a deep recession, and unemployment soared. That brief crash is in the rearview mirror. Employers added a robust 431,000 jobs in March, the U.S. Labor Department reports, and the unemployment rate fell to just 3.6 percent, a level that fits any definition of full employment.
- Inflation is running hot: The consumer price index jumped 7.9 percent in February, the highest annual rate of inflation since the bad old days of the early 1980s, according to the Labor Department. That’s forcing the Federal Reserve to act.
- The Federal Reserve is dropping the hammer: The central bank raised rates last week, and the Fed has signaled that multiple hikes are imminent. Chairman Jerome Powell and company could boost rates as many as seven times this year. The Fed also is slowing the pace of its purchases of mortgage-backed securities, a move that creates upward pressure on rates.
- The 10-year Treasury yield has risen sharply: This number is closely tied to 30-year mortgage rates, and the 10-year yield has topped 2.3 percent in recent days. Yields on federal debt reflect the overall economy. When the economy crashed in 2020, 10-year rates plunged below 1 percent. Now, they’re back.
Next steps for borrowers
Here are some tips for dealing with the new climate of rising interest rates:
- Shop around for a mortgage. Savvy shopping can help you find a better-than-average rate. With the refinance boom slowing, lenders are eager for your business. “Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” says Greg McBride, CFA, Bankrate chief financial analyst.
- Stay away from ARMs. “Don’t fall into the trap of using an adjustable-rate mortgage as a crutch of affordability,” McBride says. “There is little in the way of up-front savings, an average of just one-half percentage point for the first five years, but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.”
- Keep a cash-out mortgage in mind. While mortgage refinancing is on the wane, it can still make sense in some cases. Home prices have soared, and mortgage rates remain low enough that tapping home equity is the best way to finance home improvements.