Why Are Mortgage Rates Going Up? The Key Factors Behind Rising Rates

Mortgage rates are on the rise, leaving many prospective homebuyers wondering why it's getting more expensive to finance a home. If you're in the market for a mortgage loan, you've likely noticed that rates are significantly higher than they were just a year ago. But what's causing this upward trend in mortgage rates? In this comprehensive guide, we'll explore the key factors that are driving mortgage rates higher in 2022.

Rising mortgage rates ultimately mean it costs more to borrow money to buy a home. And higher rates reduce buyers' purchasing power, making homeownership less affordable. It's important for homebuyers to understand what's impacting mortgage rates so they can make informed decisions about their home purchase.

The Federal Reserve's Impact on Mortgage Rates

One of the biggest influences on mortgage rates is the Federal Reserve. While the Fed doesn't directly control long-term fixed mortgage rates, its policies significantly impact the direction of rates. Here's how it works:

  • The Fed raises short-term interest rates to combat inflation. This makes it more expensive for banks to borrow money.
  • Banks then pass along their higher borrowing costs to consumers in the form of higher mortgage rates.
  • Investors see bonds as less attractive investments when rates rise. This causes bond prices to drop and yields to rise.
  • Mortgage rates tend to follow the path of 10-year Treasury yields. So when yields rise, mortgage rates also go up.

In 2022, the Fed has been aggressively raising its benchmark federal funds rate to get inflation under control. This has put significant upward pressure on mortgage rates. The Fed is expected to continue raising rates this year, so mortgage rates will likely move even higher.

The Impact of Inflation

Persistently high inflation is another factor pushing mortgage rates upward. When inflation is high, lenders demand higher interest rates to offset the loss of purchasing power over the life of a loan.

The average 30-year fixed mortgage rate usually sits around 2 to 3 percentage points above the rate of inflation. With inflation at 40-year highs in 2022, it's putting tremendous upward pressure on mortgage rates.

High inflation also contributes to volatility and uncertainty in financial markets. This causes mortgage rates to fluctuate more widely. Rates can spike on any news that inflation is getting worse or data showing high consumer prices.

Global Uncertainty Drives Up Rates

Economic uncertainty across the globe is also contributing to rising mortgage rates in 2022. Here are some key factors:

  • Russia's invasion of Ukraine - This conflict has disrupted global food and energy supplies, causing prices to skyrocket. The volatility makes investors nervous, causing them to flee to safe haven investments like bonds. This drives bond prices down and yields up, which lifts mortgage rates.
  • Stock market volatility - Major stock market indexes have seen increased volatility and declines in 2022. When stocks struggle, investors often pivot to bonds, which raises bond yields and mortgage rates.
  • Recession concerns - Investors are growing concerned about a potential economic recession as central banks raise rates to fight inflation. This global economic uncertainty has driven more investment in bonds, impacting yields and mortgage rates.

When the global economy is unstable, lenders increase mortgage rates to compensate for the added risk. Volatility and uneasiness in financial markets will likely keep upward pressure on mortgage rates until the global outlook improves.

How Homebuyers Are Impacted

For prospective homebuyers, higher mortgage rates have an immediate impact on their purchasing power. Here are some of the ways today's higher rates are affecting buyers:

  • Less buying power - With today's rates, buyers can afford about 7-10% less home than they could have one year ago. This pricing-out effect is especially hard on first-time buyers.
  • Higher monthly payments - A 0.5% higher rate on a 300,000 loan adds about 150 to the monthly mortgage payment. That's $1,800 more per year that buyers have to budget for.
  • Less incentive to refinance - Current homeowners are less likely to refinance their mortgages to take advantage of home equity when rates are high.
  • Some buyers priced out - Individuals or families with lower incomes or budgets may no longer be able to afford monthly payments at today's rates.
  • Demand cooling - Higher rates combined with high home prices lead some buyers to delay their purchase. This can cool demand in the real estate market.

While every homebuyer's situation is unique, it's clear today's high rates are hindering affordability and causing many to rethink their home purchase.

What Homebuyers Can Do

While economic forces are out of your control, here are some strategies homebuyers can use to counteract the impact of higher mortgage rates:

  • Improve your credit - Having a credit score of 740 or higher can help you qualify for the lowest rates lenders offer. Pay down debts and dispute any errors to boost your score.
  • Shop with multiple lenders - Compare rate and fee quotes from several lenders to make sure you get the best deal. Online lenders may offer lower rates.
  • Consider an ARM - Adjustable-rate mortgages often come with lower introductory rates. But keep in mind your rate and payment can go up a lot over time.
  • Buy down your rate - You may choose to pay discount points upfront to lower your interest rate over the life of the loan.
  • Lock your rate quickly - When shopping, lock in your rate as soon as you find a competitive quote. Rates change daily and can rise while you wait.
  • Lower your loan amount - Put down 20% or more if possible to get a lower rate and avoid private mortgage insurance.

The Bottom Line

Mortgage rates are impacted by a variety of economic and market forces beyond an individual's control. But homebuyers still have some ability to secure a competitive rate in today's environment if they understand what's driving rates up and employ smart mortgage strategies.

While higher rates make buying a home more expensive, try not to get discouraged. Rates will fluctuate over time. Focus on finding an affordable monthly payment that works for your budget today and in the future. With the right financing, homeownership can still be within your reach.