Everyone in real estate has been emphasizing the incredible mortgage rates over the last two years, but with inflation and shifts in the economy, are these rates going to last? Many analysts say no. Read on for current rates and the details as to why they will likely change soon. 

Current State of Things

To get a good idea of what percentage increases mean, it’s necessary to establish a base. According to Zillow, as of Dec. 10, 2021, the average interest rate on a 30-year fixed-rate mortgage was at 3.057% APR. The average rate on a 15-year fixed-rate mortgage went up one basis point to 2.298% APR and the average rate on a 5/1 adjustable-rate mortgage rose three basis points to 2.832% APR. 

How Much Are Rates Expected to Rise?

Analysts will have varying predictions and reasoning when it comes to interests rates, and none of it is an exact science. Bear in mind we can only give a rough idea of what’s to come, but a rough idea is better than none. 

Many analysts gauge the 30-year fixed-rate mortgage to rise about three-eighths of a percentage point in 2022. This increase would put the 30-year fixed a little under 3.5% toward the end of 2022. These are still great rates, but not as good as they are now. Each fraction of a percent can mean thousands of dollars to homebuyers. Consider that on a loan of $400,000, a shift of half a percent in interest (from 3% to 3.5%) equals around a $40,000 difference over the life of the loan. While a shift in rates can look minor, it can have a major impact on your finances. 

Why Are Rates Expected to Rise Soon?

1. Inflation: We are in a season of uncommon inflation. When inflation goes up, so do rates to reflect the changes to our currency. Due to current supply chain issues, inflation may also persist more than expected.
2. Bond trading: As 2021 winds down bond traders will cash out so they can take a few days off for Christmas without worrying about the market. When the traders sell their mortgage-backed securities, the prices will go down and yields will go up. Mortgage rates will follow yields on that upward trajectory.

3. The Federal Reserve’s Actions:  the Federal Reserve last month announced its long-anticipated “taper” of asset purchases, and the Fed has since said it might accelerate the pace of the taper. This will likely not produce an immediate spike in rates, but it does hint to impending upward changes. As the Federal Reserve pulls back on its Covid-era stimulus, mortgage rates may also be pushed to rise.

4. Economic Recovery: This prong is more tenuous, as whether or not the economy will improve notably is up for discussion. However, a recovering economy would mean an increase in rates. A recent survey by Fannie Mae’s National Housing Survey found that 70% of Americans think the economy is “on the wrong track,” the most pessimistic result Fannie Mae has seen in 10 years. In contrast, retail sales increased by a wider margin than expected in October. 

There are many unknowns when it comes to rates, the housing market and what options you have as a homeowner. The best course of action is to talk to a Mortgage Professional who works in the trenches every day! For the best service and long-term advice in your Real Estate and Financial life, you can find an Art of Homeownership professional near you!