Last Updated on July 5, 2023 by Luke Feldbrugge
Home buyers are asking, “Are interest rates going up?” Mortgage interest rates have moved higher over the past year, but have begun decreasing over the past couple weeks. And despite the increases from last year, they remain low by historical standards. But the mortgage rate environment this year changed drastically from the previous few years when borrowers enjoyed much lower interest rates.
Decreasing inflation and a pause in rate hikes from the Federal Reserve have worked to lower mortgage rates in recent weeks.
During the COVID-19 pandemic, mortgage interest rates even hit an all-time low. In January 2021, the fixed-rate 30-year mortgage dropped to a new low of just 2.65%, according to data from Freddie Mac. This prompted a surge in new refinances and homebuyers looking to lock in their rate while the market was favorable.
However, the increased activity in the housing market amid other factors such as rising gas prices pushed inflation to new heights. Inflation reached a peak of 9.1% annually in June, marking a 40-year high. Since then, inflation has decreased, but remains historically high, most recently dropping to an annual rate of 4% in May. Because of these high levels of inflation, interest rates rose over the past year as the Federal Reserve works to bring inflation back down.
Are Interest Rates Going Up? No, They Have Fallen in Recent Weeks
Mortgage rates have more than doubled from their all-time lows hit at the beginning of last year, but they have fallen lower in recent weeks, according to Freddie Mac. Currently, the average 30-year fixed-rate mortgage rate is hovering in the upper 6% range, while 15-year mortgage rates remain in the lower 6% range.
While this may seem high compared to last year’s 3% rates, it is significantly lower than historical averages. In fact, the highest rate ever recorded for mortgage interest rates was 16.81% in 1981, according to Freddie Mac. Before the COVID-19 pandemic, in 2019, the average mortgage rate hovered near the 4% mark. At the time, this was considered historically low.
Because interest rates were significantly higher in previous years (pre-2019), homeowners who bought their homes before 2019 could reduce their monthly payments with a mortgage refinance. Even homeowners whose interest rate is close to current rates could possibly reduce their monthly payment through refinancing by lengthening their loan term.
Many first responders don’t choose the timing of their move, and may have to purchase a home even if market conditions make buying a home more expensive. But finding the right partner can help lower moving costs or even their interest rate, bringing their monthly payment lower.
But today’s housing market could actually be a welcome relief for many homebuyers, even though mortgage rates are higher than last year. During the COVID-19 pandemic, homebuyers often fell into bidding wars, or had to offer significantly more money than the asking price in order to secure the home they wanted to buy. In one instance, a couple offered $100,000 over the asking price on a home, and they were still outbid.
Since the competition has fallen significantly after mortgage rates began rising, homebuyers are facing less need to offer above asking price, and are having an easier time buying a home and securing a mortgage loan in today’s market. In fact, some even end up with a lower monthly mortgage payment on their home loan than they would have had last year.
Although rates are higher than the beginning of last year, they are still historically low. And homebuyers who want to or need to buy now can consider options to lower their interest rate such as a shorter mortgage term or even adjustable-rate mortgages (ARM). Getting pre-approved for a mortgage likely means having some money in your savings accounts and some investments like a 401k, your credit card balance in check and maintaining a credit score ideally above 620.
Why are Interest Rates Up from Last Year?
We are seeing higher interest rates versus the same time last year, but why? One of the top determining factors that answers why mortgage rates are going up is actions from the Federal Reserve. Ten times per year, officials from the Federal Open Markets Committee (FOMC) meet to discuss the current state of the economy including employment, inflation levels, GDP, recession risk and other factors. Using these economic indicators as a guide, the Federal Reserve voting members make changes to the Fed’s monetary policy to help steer the economy in a positive direction.
Some of the tools that the Fed uses in its decision-making include:
If the Fed wants to boost the economy, it implements policies that will help keep interest rates low. If it wants to slow the economy down, its policy changes will be targeted at raising interest rates.
The Federal Funds Rate
The federal funds rate is the rate that U.S. financial institutions such as banks, credit unions and others in the Federal Reserve System charge each other for overnight loans of reserves deposited at the Fed. When the Fed makes the cost higher for banks to lend money, they then pass these costs on to the consumers through their own loans. Lenders offering credit products increase the cost of the loan, and start pushing mortgage rates up as well as interest rates on other loan amounts such as auto loans, credit cards, personal loans and more.
The Federal Reserve has raised rates three times this year, which followed seven rate hikes in 2022. But at its most recent meeting in June, the Fed voted to pause its rate hikes after 10 consecutive meetings of increases. This held the Federal Funds rate at its current targeted range of 5% to 5.25%. The Federal Reserve had been raising rates in response to decades-high inflation, in an attempt to slow lending and bring inflation back down.
The Fed voted to pause its rate hikes in June, but could continue raising rates in the months to come. But the federal funds rate isn’t the only factor in determining the direction of consumer interest rates. Other factors that investors watch can also affect mortgage rates, such as the risk of a recession. In recent months, as the risk of a recession increases, interest rates have wavered.
Are Mortgage Rates Going Up or Down in 2023?
Mortgage rates are currently trending down, but could waver in the months ahead.
Over the past two weeks, mortgage rates have fallen to the upper-6% range after rising at the beginning of this month. But they are up 1.05 percentage points from last year.
Fannie Mae recently forecasted the average interest rate for a 30-year fixed-rate mortgage (FRM) will decrease slowly throughout this year, ending at 6.3% by the end of the year.
Fannie Mae also pointed out that the Federal Reserve may be done raising rates, at least for now, as inflation cools. The mortgage giant predicted the federal funds rate would peak at 5.1% before falling lower to 5% by the end of the year. The mortgage giant also predicts a small recession halfway through this year.
“Inflation has been resistant to Fed efforts to drive it down, and we view the risks to our baseline forecast as tilted toward more tightening rather than easing – although, for the moment, the Fed has adopted a wait-and-see approach,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
Interest rates have decreased in recent weeks, but remain significantly higher than the beginning of last year. But as the economy nears a potential recession this year, mortgage rates could continue falling throughout the year.
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