Average 30-year fixed mortgage rates inched up again today.
Investors have been waiting for the Federal Reserve to indicate whether it will continue its aggressive pace of hikes to the federal funds rate. Mortgage rates have been elevated this week as a result.
Mortgage rates don’t move directly in step with the federal funds rate, but they’re often indirectly impacted by Fed actions and how investors expect those actions to impact the economy.
Recently, there’s been some speculation that, as inflation has started to come down, the Fed may slow its pace of rate increases. The central bank is trying to balance getting price growth down without pushing the economy into a recession.
But even if inflation has peaked, it’s still well above the Fed’s target annual rate of 2%. So it’s likely that more large increases to the federal funds rate are coming, though they may not be the 75-basis-point hikes we saw in June and July.
Fannie Mae released its monthly economic and housing outlook this week, and anticipates a mild recession in early 2023. But because the economy is still in an overall strong place right now, the Fed isn’t likely to take its foot off the gas any time soon, says Doug Duncan, senior vice president and chief economist at Fannie Mae.
“Housing remains clearly on the downtrend – and has been for several months now – due to the combined effects of outsized home price increases and the significant and rapid run-up in mortgage rates,” Duncan says. “The question for many market observers is how quickly, and with how much additional tightening, the core inflation rate will come down to the Fed’s preferred target. In our view, the labor market’s continued strength suggests that the Fed is likely to maintain its aggressive posture through the end of the year.”
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30-year fixed mortgage rates
The current average 30-year fixed mortgage rate is 5.13%, according to Freddie Mac. This is a decrease from last week, when it was at 5.22%. This rate has been volatile in recent weeks. In early August, it dipped below 5% for the first time since April, but it then increased again the week after.
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 4.55%, a slight decrease from the prior week, according to Freddie Mac data. Last week, this rate was at 4.59%.
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 4.39%, a 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.