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Mortgage rates have increased a bit since last week. The average 30-year mortgage rate is 6.96% according to Freddie Mac, which is six basis points higher than last week. The average 15-year mortgage rate is up nine basis points at 6.34%.
The Bureau of Labor Statistics released the latest Consumer Price Index (CPI) data yesterday. Inflation rose 3.2% year-over-year in July — prior to this, inflation numbers had been cooling for about a year.
Rising inflation could keep mortgage rates high, since the Federal Reserve has been increasing rates to try to push inflation down.
It's not all bad news, though. Experts actually expected July inflation to rise by 3.3% YoY — so inflation didn't go up as significantly as predicted. Although higher inflation could keep mortgage rates high, it shouldn't cause rates to spike.
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Mortgage Rate Projection for 2023
Mortgage rates started ticking up from historic lows in the second half of 2021 and increased over three percentage points in 2022.
But many forecasts expect rates to begin to fall later this year. In their latest forecast, Fannie Mae researchers predicted that 30-year fixed rates will trend down in Q4 2023 and throughout 2024.
But whether mortgage rates will drop in 2023 hinges on if the Federal Reserve can get inflation under control.
In the last 12 months, the Consumer Price Index rose by 3.2%. This is the first inflation increase in months, and the Federal Reserve raised the federal funds rate at its most recent meeting in July. If inflation continues to go up, we could see another rate hike at the Fed's September meeting.
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 be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.
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. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you'd do with a cash-out refinance.
Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans.
When Will House Prices Come Down?
Home prices declined a bit on a monthly basis late last year, but they've started to inch up again in 2023. We aren't likely to see huge drops this year, even if there's a recession.
Fannie Mae researchers expect prices to increase 3.9% in 2023, while the Mortgage Bankers Association expects no change in 2023 and a 1% increase in 2024.
Sky-high mortgage rates have pushed many hopeful buyers out of the market, slowing homebuying demand and putting downward pressure on home prices. But rates may start to drop next year, which would remove some of that pressure. The current supply of homes is also historically low, which will likely keep prices from dropping too far.
Fixed-Rate vs. Adjustable-Rate Mortgage Pros and Cons
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.
ARMs typically start with lower rates than fixed-rate mortgages, but ARM rates can go up once your initial introductory period is over. If you plan on moving or refinancing before the rate adjusts, an ARM could be a good deal. But keep in mind that a change in circumstances could prevent you from doing these things, so it's a good idea to think about whether your budget could handle a higher monthly payment.
Fixed-rate mortgage are a good choice for borrowers who want stability, since your monthly principal and interest payments won't change throughout the life of the loan (though your mortgage payment could increase if your taxes or insurance go up).
But in exchange for this stability, you'll take on a higher rate. This might seem like a bad deal right now, but if rates increase further in a few years, you might be glad to have a rate locked in. And if rates trend down, you may be able to refinance to snag a lower rate
How Does an Adjustable-Rate Mortgage Work?
ARMs start with an introductory period where your rate will remain fixed for a certain period of time. Once that period is up, it will begin to adjust periodically — typically once per year or once every six months.
How much your rate will change depends on the index that the ARM uses and the margin set by the lender. Lenders choose the index that their ARMs use, and this rate can trend up or down depending on current market conditions.
The margin is the amount of interest a lender charges on top of the index. You should shop around with multiple lenders to see which one offers the lowest margin.
ARMs also come with limits on how much they can change and how high they can go. For example, an ARM might be limited to a 2% increase or decrease every time it adjusts, with a maximum rate of 8%.