Mortgage rates are no longer spiking, though they remain elevated. Rates started rising last week in anticipation of Federal Reserve Chair Jerome Powell’s Aug. 26 speech in Jackson Hole.
The Fed has been raising the federal funds rate to try to slow inflation, and there are signs that its efforts are working. But even as inflation decelerates, prices are still rising faster than the Fed would like, which means more rate hikes are on the way.
In his speech, Powell affirmed that the central bank will continue to act aggressively to fight price growth, even if it means slowing the economy more dramatically.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
What does this mean for mortgage rates? Right now, the economy is still relatively strong, which means mortgage rates are likely to remain elevated. But if the Fed’s actions spark a mild recession — which Fannie Mae has predicted will happen in early 2023 — rates may start to come down.
“The basic rule of thumb is that good news for the economy is bad for mortgage rates, and bad news for the economy is good for rates,” says Sarah Alvarez, vice president of William Raveis Mortgage.
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30-year fixed mortgage rates
The current average 30-year fixed mortgage rate is 5.55%, according to Freddie Mac. This is a significant increase from last week, when it was at 5.13%.
The 30-year fixed-rate mortgage is the most common type of home loan. With this type of mortgage, you’ll pay back what you borrowed over 30 years, and your interest rate won’t change for the life of the loan.
The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you’ll have a higher rate than you would with shorter terms or adjustable rates.
15-year fixed mortgage rates
The average 15-year fixed mortgage rate is 4.85%, an increase from the prior week, according to Freddie Mac data. Last week, this rate was at 4.55%.
If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you’ll have a higher monthly payment than you would with a longer term.
5/1 adjustable mortgage rates
The average 5/1 adjustable mortgage rate is 4.36%, a small decrease from the previous week.
Adjustable rate mortgages can look very attractive to borrowers when rates are high, because the rates on these mortgages are typically lower than fixed mortgage rates. A 5/1 ARM is a 30-year mortgage. For the first five years, you’ll have a fixed rate. After that, your rate will adjust once per year. If rates are higher when your rate adjusts, you’ll have a higher monthly payment than what you started with.
If you’re considering an ARM, make sure you understand how much your rate could go up each time it adjusts and how much it could ultimately increase over the life of the loan.
Will mortgage rates go up in 2022?
To help the US economy during the COVID-19 pandemic, the Federal Reserve aggressively purchased assets, including mortgage-backed securities. This helped keep mortgage rates at historic lows.
However, the Fed has begun to reduce the assets it holds and is expected to increase the federal funds rate three more times in 2022, following increases in March, May, June, and July.
Though not directly tied to the federal funds rate, mortgage rates are sometimes pushed up as a result of Fed rate hikes and investor expectations of how those hikes will impact the economy.
Inflation remains elevated, but has started to slow, which is a good sign for mortgage rates and the broader economy.
What is a fixed-rate mortgage vs. adjustable-rate mortgage?
Historically, adjustable mortgage rates tend to be lower than 30-year fixed rates. When mortgage rates go up, ARMs can start to look like the better deal — but it depends on your situation.
Fixed-rate mortgages lock in your rate for the entire life of your loan. Adjustable-rate mortgages lock in your rate for the first few years, then your rate goes up or down periodically.
Because adjustable rates start low, they are worthwhile options if you plan on selling your home before the interest rate changes. For instance, if you get a 7/1 ARM and want to move before the seven year fixed-rate period is up, you won’t risk paying a higher rate later.
But if you want to buy a forever home, a fixed rate could still be a better fit, since you won’t chance your rate increasing in a few years.