The era of ultralow mortgage rates has come to an end.
According to Freddie Mac, the average 30-year fixed mortgage rate has surpassed 4% for the first time since May 2019. The average interest rate on America’s most popular home loan was 3.22 percent at the start of the year. It fell to a record low of 2.65 percent in January 2021, and it spent more than half of the year below 3 percent.
Home loan rates had been rising in the run-up to the Federal Reserve’s decision to raise interest rates for the first time since 2018. And, while the Fed’s quarter-point increase had no effect on Freddie Mac’s weekly average of 4.16 percent before the announcement, it is likely to send rates even higher. Mortgage rates are closely linked to the yield on the 10-year US Treasury note, which rises in lockstep with the Fed’s benchmark rate.
Rising borrowing costs present an additional challenge for would-be homeowners who are already dealing with skyrocketing home prices. While still historically low, an average rate of around 4% is significantly higher than the sub-3 percent rates that were available for much of last year. And, the last time the 30-year mortgage rate topped 4%, the median home price was $277,000, or 26% less than it is now.
According to Realtor.com data, the monthly payment on a $375,000 home with a 4% interest rate is $220 higher than the payment on a comparable priced home in December 2020, when rates were near record lows. That would add $79,200 to a 30-year mortgage with a 20% down payment. The Wall Street Journal’s parent company, News Corp, also operates Realtor.com under a license from the National Association of Realtors.
Higher interest rates have begun to dampen demand for mortgages used to purchase homes. According to the Mortgage Bankers Association, applications for purchase mortgages fell 3.9 percent in February compared to the same month last year.
However, demand is down less than expected, according to economists, due in part to a lack of inventory. According to the National Association of Realtors, there was a record-low 1.6-month supply of homes on the market in January at the current sales pace.
“There are still a lot of people who can afford to absorb these higher rates, perhaps people with generational wealth or equity gained from previous transactions,” said Selma Hepp, CoreLogic’s deputy chief economist.
Rising interest rates will make it more difficult for homeowners to save money by refinancing. According to mortgage-data firm Black Knight Inc., the pool of borrowers who could lower their monthly payments by refinancing fell to around 4 million in February, down from nearly 18 million in February 2021.
According to Fannie Mae, a steep drop in refinancings is expected to drag total single-family mortgage originations down by nearly 38 percent in the first quarter compared to the same period last year.