You may have to be prepared to pay more to borrow for a home.
- Your goal in signing a mortgage should be to get the lowest interest rate possible.
- You could end up with a higher rate due to damage to your credit score or other factors beyond your control.
Home prices have been high for over a year due to limited inventory and strong buyer demand. Many potential buyers are banking on relatively low mortgage rates to help offset their higher purchase costs.
So far, mortgage rates have been higher in 2022 than they were in 2021. But here’s why you could end up with an even higher rate this year.
1. Fed actions could boost rate hikes
The Federal Reserve has made it clear that it intends to raise interest rates. Now the Fed no longer sets mortgage rates or consumer interest rates. Rather, it sets the rates that banks charge each other for short-term borrowing.
That said, the actions of the Fed can affect consumer rates and push them up. That’s not always a bad thing. If you have money in a savings account, you could see your interest rate go up later this year. But if you’re looking for a mortgage, you might end up with a higher rate.
2. Inflation can cause credit score damage
Nowadays, many people find it difficult to meet their daily expenses due to inflation. If this happens to you, it could cause you to fall behind on some bills. And if you pay your bills late, you could do some pretty serious damage to your credit score.
Meanwhile, the higher your credit score, the better the interest rate a lender is likely to offer you on a mortgage. You could end up paying more to borrow if inflation causes your financial behavior to change and your credit score to drop.
Also, an increase in daily expenses could require you to carry more than one balance on your credit cards. It could also cause your score to drop.
Now, to be fair, if you’re really at a point where you can’t keep up with everyday bills due to inflation, then it’s probably not a good time to try and buy a house. . But maybe you have money set aside for a down payment that you don’t want to touch, so you’re racking up debt on your credit cards to avoid having to dip into your down payment funds. Still, going this route could hurt your credit, so it’s something you’ll want to be aware of.
How high will mortgage rates be this year?
It is difficult to predict how much the rates will rise during the year. It’s not unreasonable to expect the average 30-year mortgage to hit 4.5% at some point in the near term, and perhaps even move closer to 5% as the year progresses.
That might seem like a lot to pay for a mortgage based on the rates borrowers have enjoyed over the past two years. But it’s also important to remember that historically, an interest rate in the 4% range isn’t bad for a 30-year loan.
That said, if you want to increase your chances of getting the lowest possible interest rate on a mortgage, work to boost your credit or take steps to avoid damaging your score. You can’t control what the Fed does and the impact of its actions on mortgage rates. But you can try to take steps to improve your personal financial situation so that you can take advantage of as low a mortgage rate as possible.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are, interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.