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Mortgage rates have increased over three percentage points so far this year, and they've risen rapidly this week. Rates are currently the highest they've been since 2008.
Rising rates have erased the affordability many homebuyers found at the height of the pandemic, when mortgage rates were at all-time lows. Even as home prices shot up, buyers enjoyed average 30-year fixed rates as low as 2.65%, according to Freddie Mac. On a $250,000 mortgage, that translates to a monthly payment of just $1,000. If a buyer were to get that same mortgage today, their monthly payment would be over $1,500.
In search of more affordable monthly payments, many borrowers have been turning to adjustable-rate mortgages (ARMs). ARMs typically have lower rates than fixed-rate mortgages, though your rate will start changing periodically after a certain number of years, which can make these mortgages risky if rates go up.
An ARM will save you money now, and if rates improve later, you may be able to refinance into a fixed-rate mortgage to lock in a better rate.
However, Melissa Cohn, regional vice president of William Raveis Mortgage, says that a fixed rate could still be a good idea right now. It's not guaranteed that you'll be able to refinance out of the ARM.
"If you make a small down payment of 5% or 10% of the purchase price, you may be better off with a fixed rate if you think real estate values will fall in your area," says Cohn. "When it is time to refinance, the bank will re-appraise your home, and if the value has dropped, that could have a material impact on your ability to refinance."
An ARM can help you keep your payment lower now, but it's important to think about your long-term plan and what you might do if you're unable to sell or refinance before your rate resets.
Use our free mortgage calculator to see how today's mortgage rates would impact your monthly payments. By plugging in different rates and term lengths, you'll also understand how much you'll pay over the entire length of your mortgage.
Click "More details" for tips on how to save money on your mortgage in the long run.
The current average 30-year fixed mortgage rate is 6.29%, according to Freddie Mac. This is the highest this rate has been since 2008, and the fifth week in a row it's increased.
The 30-year fixed-rate mortgage is the most common type of home loan. With this type of mortgage, you'll pay back what you borrowed over 30 years, and your interest rate won't change for the life of the loan.
The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you'll have a higher rate than you would with shorter terms or adjustable rates.
The average 15-year fixed mortgage rate is 5.44%, an increase from the prior week, according to Freddie Mac data. The last time this rate was above 5% was in 2009.
If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you'll have a higher monthly payment than you would with a longer term.
The average 5/1 adjustable mortgage rate is 4.97%, a slight increase from the previous week.
Adjustable-rate mortgages can look very attractive to borrowers when rates are high, because the rates on these mortgages are typically lower than fixed mortgage rates. A 5/1 ARM is a 30-year mortgage. For the first five years, you'll have a fixed rate. After that, your rate will adjust once per year. If rates are higher when your rate adjusts, you'll have a higher monthly payment than what you started with.
If you're considering an ARM, make sure you understand how much your rate could go up each time it adjusts and how much it could ultimately increase over the life of the loan.
Mortgage rates started ticking up from historic lows in the second half of 2021 and have increased significantly so far in 2022. More recently, rates have been relatively volatile.
In the last 12 months, the Consumer Price Index rose by 8.3%. The Federal Reserve has been working to get inflation under control, and plans to increase the federal funds target rate two more times this year, following increases at its last five meetings.
Though not directly tied to the federal funds rate, mortgage rates are sometimes pushed up as a result of Fed rate hikes and investor expectations of how those hikes will impact the economy.
Inflation remains elevated, but has started to slow, which is a good sign for mortgage rates and the broader economy.
Some mortgage lenders let you customize your mortgage rate on their websites by entering your down payment amount, zip code, and credit score. The resulting rate isn't set in stone, but it can give you an idea of what you'll pay.
If you're ready to start shopping for homes, you may apply for preapproval with a lender. The lender does a hard credit pull and looks at the details of your finances to lock in a mortgage rate.
You can apply for prequalification with multiple lenders. A lender takes a general look at your finances and gives you an estimate of the rate you'll pay.
If you're farther along in the homebuying process, you have the option to apply for preapproval with several lenders, not just one company. By receiving letters from more than one lender, you can compare personalized rates.
Applying for preapproval requires a hard credit pull. Try to apply with multiple lenders within a few weeks, because lumping all of your hard credit pulls into the same chunk of time will hurt your credit score less.
