Mortgage Rates Are Increasing. Here's What That Means If You're Buying A Home.

• Mortgage rates were at record lows in 2020 and 2021, but they’ve been increasing in 2022.
• The 30-year rates could jump above 4% this year, but that’s still low compared to a few years ago.
• Higher rates don’t mean you shouldn’t buy a home right now — you can’t time the real estate market.
• This article is part of “The Road to Home” series focused on helping first-time homebuyers navigate the daunting and exhilarating process of purchasing a home.

McClinton was able to secure a $220,000 loan this year with an interest rate of 2.9% — a number she thought was extraordinarily low.

“I was shocked,” she said. “I asked the lender multiple times, ‘Are you sure this is for the entire loan? Seriously?'”

The US has been experiencing all-time low mortgage rates for almost two years. But all of that is changing.

Low mortgage rates are usually reflective of a struggling economy. Rates plummeted in 2020 when the coronavirus pandemic began, people lost jobs, businesses closed, and the Fed lowered the federal funds rate to 0% to 0.25%. They stayed at record lows throughout 2020 and 2021.

Mortgage rates have started rising in the beginning of 2022, though. Yes, the US economy is still working its way back from the damage caused by the pandemic. But it’s also successfully added more jobs, more people are joining the workforce, and inflation has soared.

These trends can be good for the economy, but potential homebuyers may be upset that they can’t get a rate under 3% anymore, like McClinton did. How high are rates going to get, and what does this mean for buying a home?

What are current mortgage rates?

Thirty-year fixed mortgage rates are getting closer to 4%. They were well below 3% in early 2021. This stark difference can make it seem like rates are high and you’ve missed the opportunity for a good mortgage rate.

However, data from Freddie Mac shows that mortgage rates are still relatively low. As recently as late 2018, 30-year rates were at almost 5%.

Will mortgage rates go up in 2022?

Mortgage rates have already gone up this year, and it’s possible they will continue to increase. The Fed expects to raise the federal funds rate multiple times in 2022 in response to inflation, which could be a sign that mortgage rates will also increase.

There are plenty of other factors to consider, though. If there’s a new wave of the coronavirus, or the Russia-Ukraine conflict heavily impacts the US, economic growth could slow and the rise in mortgage rates might stall.

Rates are likely to continue to rise throughout 2022, just not as rapidly as they did in January and February.

“They could go up as high as 4.5%,” said Nicole Rueth, producing branch manager at The Rueth Team of Fairway Mortgage. “Then I think they’ll come back down as we go into some sort of recession where the economy slows down, inflation slows down, and then that 30-year fixed rate comes down as a result.”

But while rates could decrease later in 2022, Rueth doesn’t necessarily expect them to fall back below 3% like they were last year.

How rates should factor into the homebuying process

There are a number of factors that homebuyers should consider when buying a home — and mortgage rates, of course, are one of them.

While the low rates we’ve grown accustomed to over the last two years have gotten most of the attention, a decision about whether or not to purchase a home ultimately should not come down to interest rates.

“You shouldn’t make your buying decisions of a home based on where interest rates are,” said Shant Banosian, the executive vice president of sales at Guaranteed Rate.

Banosian, the firm’s No. 1 loan originator in the US, believes that now is as good a time as any to purchase a home. Rates are increasing from the historical lows of 2020 and 2021, but are still, generally, at a reasonable rate. He said there’s no need to panic just yet.

Although a higher interest rate will increase your monthly payment, the change might not be as drastic as you’d expect.

For example, a few months ago, you may have been able to lock in a 3.5% rate on a 30-year mortgage for $300,000. Your monthly payment on the principal and interest would have been $1,347.13.

Let’s say you apply for a mortgage for the same amount now, but you lock in a 4% rate instead. With the higher rate, that monthly payment is $1,432.25. Yes, you’d prefer the lower interest rate — but your monthly payment goes up by less than $100.

“Homeownership is a major milestone goal for most people in our country, so I think people are going to buy homes no matter what interest rates are,” Bansonian said.

First-time homebuyers face greater obstacles than rising rates

Joel Kan, the associate vice president of economic and industry forecasting for the Mortgage Bankers Association, sees rates continuing to increase — up to, potentially, 4.25% toward the end of 2022. But again, Kan said, there’s no need to worry: Even rates above 4% rates are still low.

However, he added, other economic factors have emerged as more decisive roadblocks for homebuyers.

“You’re combining a higher mortgage rate with home prices that have been increasing at 17% and 18% year-over-year for the country,” Kan said.

Indeed, skyrocketing home prices and severely low inventory, or too few homes on the market, are the main reasons it’s hard to buy a home.

How to cope with rising interest rates

The best advice to navigate the rising interest rates, according to Guaranteed Rate Senior Vice President of Mortgage Lending Jennifer Beeston, is to regularly check in with your lender.

“The best thing you can do is make sure you are keeping good tight contact,” Beeston said. “Because if you are pre-approved in October or November and you haven’t checked in, you may not qualify now.”

Beeston also suggests that prospective buyers ask to be a second, or even third, option when applying for a home in case the first buyer’s purchase falls through. As rates increase, some people may realize they can no longer afford the same home they could just weeks before.

“Everyone wants to time the market,” Beeston said, “but the market is impossible to time.”