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Mortgage rates have been rising rapidly over the past few days. According to Freddie Mac, the average 30-year fixed rate reached 6.65% this week, which is 56 basis points higher than it was a month ago.
Rates are rising in response to investor expectations that the Federal Reserve will continue hiking the federal funds rate this year.
Initially, as inflation showed signs of slowing, many expected that the Fed would slow its pace of hikes and cut rates later in 2023. But more recent economic data points to an economy that has remained stubbornly hot in spite of the Fed's tightening.
Mortgage rates will likely remain elevated until inflation comes down further, which may happen later this year.
"As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy," Sam Khater, Freddie Mac's chief economist, said in a press release. "However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward seven percent."
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30-Year Fixed Mortgage Rates
The current average 30-year fixed mortgage rate is 6.65%, according to Freddie Mac. This is an increase from the previous week.
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 5.89%, an increase from the prior week, according to Freddie Mac data.
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.
Are Mortgage Rates Going Up?
Mortgage rates started ticking up from historic lows in the second half of 2021 and increased significantly in 2022. But mortgage rates are expected to trend down this year.
In the last 12 months, the Consumer Price Index rose by 6.4%. The Federal Reserve has been working to get inflation under control, and is expected to keep the federal funds rate elevated until it comes down to the Fed's target rate of 2%.
Inflation remains elevated, but has started to slow, which is a good sign for mortgage rates and the broader economy.
How Do Fed Rate Hikes Affect Mortgages?
The Fed has been increasing the federal funds rate to try to slow economic growth and get inflation under control.
Mortgage rates aren't directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed hikes to affect the broader economy.
As inflation starts to come down, mortgage rates should, too. But the Fed has indicated that it's watching for sustained signs of slowing inflation, and it's not going to lower rates again any time soon — though it has started opting for smaller hikes.
Are HELOCs a Good Idea Right Now?
Many homeowners gained a lot of equity over that past few years as home prices increased at an unprecedented rate. But because rates are so high now, tapping into that equity can be expensive.
For homeowners looking to leverage their home's value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may still be a good option.
A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you're borrowing in a lump sum.
Depending on your finances and the type of HELOC you get, you may be able to get a better rate with a HELOC than you would with a home equity loan or a cash-out refinance. Just keep in mind that HELOC rates are variable, so if rates start to trend up further, yours will likely increase, as well.