When will mortgage rates hit 5%?

Over the past decade, American homeowners have grown accustomed to mortgage rates that once would have been incredibly low. The rate on a 30-year loan started with a three or a four, maybe even a two.

Rates above 5%? It was extremely rare. Over the past 10 years, the average cost of a 30-year mortgage exceeded the 5% threshold for just one fleeting six-week period at the end of 2018, according to Bankrate’s Weekly National Lender Survey.

Times are changing fast, however. The average rate on a 30-year loan jumped to 4.59% in this week’s survey – and 5% may not be far off.

“I would expect 5 to show up within a month, especially if there are additional Russian sanctions that point to bigger supply issues,” says Joel Naroff, president of Naroff Economic Advisors.

Ken H. Johnson, a housing economist at Florida Atlantic University, also said rates could soon hit the 5% mark. “Unless things slow down in the 10-year Treasury market overnight,” he says. “We are now outside the bounds of normalcy. Strange things happen at the height of a market.

Why are mortgage rates rising so fast?

The forces that drive mortgage rates are notoriously complicated, but here are four factors:

  • The economy is back: The pandemic plunged the US economy into a deep recession and unemployment soared. This brief accident is in the rearview mirror. Employers added 678,000 jobs in February, the US Department of Labor reports, and the unemployment rate fell to just 3.8%, a level that meets any definition of full employment.
  • Inflation is heating up: The consumer price index jumped 7.9% in February, the highest annual inflation rate since the bad old days of the early 1980s, according to the Labor Department. This forces the Federal Reserve to act.
  • The Federal Reserve drops the hammer: The central bank raised rates last week and the Fed has signaled that more hikes are imminent. Chairman Jerome Powell and company could hike rates up to seven times this year. The Fed is also slowing the pace of its purchases of mortgage-backed securities, a move that is creating upward pressure on rates.
  • The 10-year Treasury yield rose sharply: This figure is closely linked to 30-year mortgage rates, and the 10-year yield has exceeded 2.3% in recent days. Federal debt yields reflect the overall economy. When the economy crashed in 2020, 10-year yields plunged below 1%. Now they are back.

Next steps for borrowers

Here are some tips for dealing with the new climate of rising interest rates:

  • Shop around for a mortgage. Savvy shopping can help you find an above-average rate. With the refinancing boom slowing, lenders are hungry for your business. “Doing an online search can save thousands of dollars by finding lenders with a lower rate and more competitive fees,” says Greg McBride, chief financial analyst at Bankrate.
  • Stay away from ARMs. “Don’t fall into the trap of using an adjustable rate mortgage as an affordability crutch,” McBride says. “There are few upfront savings, averaging only half a percentage point for the first five years, but the risk of higher rates in future years is significant. The new adjustable mortgage products are structured to change every six months rather than every 12 months, which was previously the norm.
  • Keep in mind a mortgage with withdrawal. Although mortgage refinancing is on the decline, it can still make sense in some cases. Home prices have soared and mortgage rates remain low enough that tapping into home equity is the best way to finance home renovations.
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