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Mortgage Rates are Rising: Here's What Homebuyers Should Know

Mortgage rates have been rapidly climbing for the last several weeks. Here's what's causing the surge and what homebuyers should know.

January 15, 2022
January 15, 2022
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Mortgage rates increased sharply for the second straight week and are flirting with 3.5% for the first time since March 2020, according to the Freddie Mac Primary Mortgage Market Survey (PMMS).

But the sharp rise in rates doesn’t necessarily signal the end of the pandemic era homebuying frenzy – nor should it. An understanding of what’s causing rates to rise and a sense of what’s coming next may help homebuyers plan their next moves.

What's in this Article?

               Why are mortgage rates rising?      




               Where will mortgage rates go in 2022?      




               Should homebuyers wait for a better rate?      




Why are mortgage rates rising?

The short answer: investors are reacting to policy changes at the Federal Reserve and creating market conditions for higher mortgage rates.

Here’s the long answer:

In addition to your personal borrower profile (credit score, debt-to-income (DTI), down payment, etc.), mortgage rates are set by supply and demand on the secondary mortgage market, where investors buy and sell bundled-mortgages much like stocks.

These mortgage bundles, known as mortgage-backed securities (MBS), are considered safe investments and are in high demand during times of economic uncertainty – such as a global pandemic. When demand is high, the rate of return for MBS decreases, which lowers the base mortgage rate for homebuyers.

In addition to investors, the Federal Reserve was purchasing $40 billion in MBS for much of the pandemic to encourage lending and spending by keeping interest rates artificially low.

In September, the Fed announced its intention to gradually reduce these purchases – known as tapering – and end its stimulus spending in June 2022. The Fed has since accelerated that plan to end its bond purchasing in March and cleared a path to raise the federal funds rate several times in 2022.

To be clear, the Federal Reserve does not directly set mortgage rates, but its policy influences them.

And that’s what’s happening now. Investors are reacting to the Fed’s increasingly hawkish monetary policy and pulling back their demand for MBS. The recent spike is due to speculation over what the Fed will do in the face of the 7% inflation reported for December. Previously, economists were predicting two or three increases to the federal funds rate in 2022. Now, many are speculating there will be a fourth, with the first coming in March.

All this to say investors are spooked over what’s happening at the Central Bank and mortgage rates are rising as a result.

Where will mortgage rates go in 2022?

Much like the weather, predicting mortgage rates is difficult, especially over the long term. There are just too many factors and variables to pin down.

Recent forecasts for the 30-year fixed rate from six leading housing authorities range from 3.1% and 3.8% for 2022 with an average of 3.55%. This provides a ballpark for rates -- who knows where they'll actually go.

History is another indicator of where mortgage rates could trend in the near future. In the last 10 years there have been two rate spikes steeper than the current one.

One in mid-2013 known as the “Taper Tantrum” represents the last time the Federal Reserve pulled back its stimulus spending. During this spike, rates rose more than a full percentage point in a matter of weeks. However, today’s circumstances are quite different. In 2013, investors reacted at the mere suggestion of a taper. Today, investors have known the taper was coming for several months (probably much longer) and are reacting to inflation reports and the acceleration of the taper’s pace.

The second spike was in 2016 when the average 30-year rate rose nearly 0.8 points in the weeks following the general election.

Both instances, 2013 and 2016, were followed by months or years of rates slowly settling back down. That seems to be the nature of the beast when it comes to mortgage rates: sharp inclines followed by long, slow declines.

Based on previous trends, homebuyers can expect the same in 2022. Rates may rise even further in the following weeks, but they’re likely to float back down afterward.

And for context, mortgage rates were flirting with 5% just three years ago -- and people still bought homes. Those homeowners may have second-guessed themselves at the time, but have since earned home equity at an unprecedented rate and had ample opportunity to refinance to a much lower rate.

Should homebuyers wait for a better rate?

Homebuyers may be able to wait out the current spike to lock in a lower rate. In just the last few weeks, the 30-year rate has increased from 3.05% to 3.45% on the Freddie Mac PMMS. Here’s how how that affects monthly payments:

Purchase price  Down payment  30-year fixed rate  Estimated monthly payment$300,00010%3.05%$1,409$300,00010%3.45%$1,468The figures above represent are for reference only and are not an offer to lend.

The 0.4 point rate increase translates to an additional $59 to the monthly payment or $798 per year on a $300,000 home. Some homebuyers are willing to pay that, others may be tempted to wait for lower rates.

But waiting for rates to fall may be more costly than it’s worth. The housing market is poised for another busy year with healthy price grains. Price growth forecasts from eight leading authorities range from 16% to -2.8%, with an average of 6.1%.

So a home that’s currently worth $300,000 is expected to earn $18,300 in equity over the next year, or $1,525 per month. Not a bad return for spending an extra $59 per month for a slightly higher mortgage rate. And that’s not to mention that money lost to inflation and home price gains as homebuyers wait for rates to fall again.

The housing market is not the stock market where a week or two can make or break your investment. The name of the game is to get in when you’re ready and stay in as long as you can.

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